What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business that one person owns and manages. As the business and the owner are not legally separate, it is the simplest form of business structure. It is also known as individual entrepreneurship, sole trader, or simply proprietorship.
The business owner, usually referred to as a proprietor or a trader, uses their legal identity to conduct business. Additionally, they have the option to register a trade name with their local authority and conduct business under a different name.
The simplest and least expensive type of business to start is this one. It is typical among small enterprises, independent contractors, and other self-employed people due to this.
A sole proprietorship starts and ends with the decision of the business owner or with their passing.
If a business expands significantly, a sole proprietorship may change into another, more complicated business structure.
Advantages of Sole Proprietorships
- The simplest and least expensive way to launch a business
Contrary to creating a partnership or corporation, establishing a sole proprietorship is typically a simple and affordable process, albeit the procedure differs depending on the jurisdiction.
There is comparatively less paperwork that a proprietor must submit to their local government as compared to other business forms. Owners don’t have to wait very long to receive authorization to operate a business as a result.
The cheap start-up costs are in keeping with numerous government initiatives that encourage business owners to take calculated risks in order to boost the economy.
- government regulations and legislation are few
There aren’t many laws and regulations that apply specifically to business owners. A sole proprietor is responsible for keeping accurate records, filing tax returns, and paying taxes on both business and personal income.
Obligations related to record keeping and tax filing are typically not more difficult than keeping records for individual tax filings. Owners may want to spend money on specialized software and advisors to reduce the amount of time spent on administration due to the time and effort involved.
Government regulations, such as those governing financial disclosure, are only applicable to larger businesses and publicly traded corporations and demand far more administrative work.
- total command and control
Owners are in complete control of every area of their company, including manufacturing, sales, finances, human resources, etc. Given that the success of the business also equals personal success, many entrepreneurs find this level of freedom appealing.
Owners must be “excellent enough” at the different areas of their firm that they have control over in order to be successful.
Although some business owners transfer some of their responsibility to their employees and have staff, they are still ultimately responsible for all corporate decisions and actions.
- Profit flow from a business
The owner receives 100% of the revenues because there is no legal distinction between the business and the owner. Although all profits belong to the owner, taxes are only paid once, and business owners are responsible for their own taxes.
Periodically, for instance as part of their yearly individual tax filing, proprietors must pay individual taxes on the income. Depending on the local tax laws, tax payments could be made more frequently, like quarterly.
A proprietor can prevent their tax burden from being too large and resulting in tax penalties by making frequent payments. Tax consultants can assist business owners with tax estimation so they can set aside enough money from their profits to make required government payments.
Disadvantages of Sole Proprietorships
- Indefinite legal responsibility
The owner and the company are legally one and the same. All debts and liabilities belong to the business owner, just like all earnings go to the owner.
If the company is unable to pay its debts, creditors may go after the owner’s personal assets to get compensated.
Legal contracts, referred to as promissory notes, that borrowers sign with lenders expressly define this responsibility. As the sole proprietorship and the owner are the same legal entity for purposes of the law, the owner is not required to give a personal guarantee to the sole proprietorship.
- Capital availability ceiling
When starting their own business, owners invest their own money. When they look for lending partnerships, their credit options and financial resources are restricted.
Owners cannot raise money by selling stock or other interests in their company.
It can be costly and risky to bring ideas to life. It can require a lot of capital to maintain a business. Prior to generating money, some costs must be incurred. Working capital must be used to finance any credit sales as well as any cash expenditures for expenses. The company needs to finance or rent its equipment and other long-term resources.
Also Read: Corporate Structure
- a reserve and a successor
The business ceases to exist if the owner is unable or unwilling to run it. In the event of illness or any other temporary and unforeseeable reason, an owner may have a family member or trusted employee who can temporarily work in the owner’s place.
Longer-term costs may be covered by business interruption insurance, but these policies cannot finish the task that an owner has already started.
Sole proprietorships cannot easily transfer any intangible assets from one owner to another since they lack a distinct legal personality. In addition to machinery and fixed assets, the owner is inextricably linked to the value of the business.
- abilities and expertise
In every aspect of the firm, the owner must take “good enough” decisions. An owner may make poor decisions if they lack the necessary expertise or understanding. There is a limited amount of time to learn how to perform everything correctly or adequately.
It can be challenging for individuals to effectively manage every part of their organization. The business owner has the option of hiring staff, enlisting outside assistance, or seeking expert guidance on certain business operations.
An important factor to take into account is if the owner can use their own time to increase profits enough to cover the cost of hiring help.
Such sole proprietorships could find it too expensive to hire staff, use contractors, or use other services. The time of the owner must be profitable enough to cover the expense.