Sole Proprietorship

What is sole proprietorship?

It is used for a business owned by a single owner who is also referred to as the sole proprietor of the business.

It enjoys many benefits like full ownership, full profits and secrecy and rouses personal interest. However, it has a few setbacks like full liability, small capital and lack of management.

Benefits of sole proprietorship:

Ownership of All profits: Unlike companies, no concept of distribution of profits, it is all owned by the sole owner.

Ease of formation: It is easy to form a single owner business, and requires no permission from the government like registration processes and such.

Ease of dissolution: Similary to formation, it is easy and quick to dissolve unlike a company. Company dissolution takes time and money and also involves law.

Lack of legal constraints: Companies tend to follow laws, rules and regulations.

Tax savings: In sole owner, income tax is incurred only once unlike a company where the tax is imposed twice (once on company, and once on profits). Moreover, companies must pay corporate tax, which the sole proprietor is exempted from.

Personal Interest: Owner has his own personal interests and offers maximum of his services and energy for growth of his business that is not the case in companies where employees do not have the benefits of company in their minds.

Freedom: Owner makes his own descisions with no pressure from anyone else.

Secrecy: In company, all affairs of accounts are printed to that they can be distributed to shareholders and such. It is not the case in sole ownership.

Credit standing: Enjoys high credit standing because the liability is not limited to investment but also the personal assets.

Low cost: Does not need any formation costs, large capital or heavy expenditure.

Disadvantages of sole proprietorship:

Unlimited liability: Proprietor will have to resort to personal assets to pay off debts in case of business failure.

Difficulties in management: Sole owner cannot afford highly qualified staff for management. It ends up running into complex issues throughtout the business activities.

Lack of employment opportunities: Does not offer any career opportunities due to limited size unlike companies.

Limited size: Due to lack of capital and sole owner, it does not increase in size throughout the duration.

No longetivity/ Uncertain life: Death of owner ends the business which is not the case in partnerships or companies where companies are limitless.