What is the Meaning of Sole Proprietorship?
A sole proprietorship is a type of business in which a single person owns and manages the business. This person is responsible for all the transactions that occur in the business.
Sole Proprietorship is the simplest type of business. Examples of sole proprietors are freelancers, landscapers, and retail shops/enterprises.
Sole proprietorship are businesses with the simplest structure. They don’t need a lot of capital to get started. However, you should not avoid going through the government registration rules. Permit/ license laws make your business legit. You need to stay sharp as you are responsible for everything that happens to your business.
In sole proprietorship, there is no legal distinction between personal and business assets. Hence, the owner pays taxes from the profits.
Sole Proprietorship business is very common in India. Many people choose self-employment in place of getting employed in a corporation.
Forming a sole proprietorship has potential advantages and pitfalls. Some of them are highlighted below.
Advantages of Sole proprietorship
1. Sole proprietorship is easier to set up and terminate. All you need to set up a sole proprietorship is rent or buy the required equipment, put up an advert to show you are in business and get a work permit (trade license) from the local government.
You do not need to consult anyone if you want to quit the business. You simply stop.
2. Sole proprietorship derives a sense of pride. In many countries, particularly India, a sole proprietorship business is considered very prestigious. You get all the credit for your success. This makes you proud of yourself. You become a respected person within your community.
3. Sole Proprietors keep all the profit. You don’t have to split the benefits the business makes. You use the money at your own discretion. Unlike a partnership, where the profit is shared among the partners, the owner of a sole proprietorship business has exclusive rights over the profits made by the business.
4. Ease of changing the business structure. Since the formalities are few, any changes in the business structure is also simple. It is easier to change your business to a model that is of advantage to you. What you simply need to do is file paperwork for your new business structure.
5. It is easy to hire employees. Since you are the owner of the business, you can employ your friends and relatives without a formal declaration. You are in full control. You have direct access to your employees. Further, you get a chance to build a healthy relationship with you employees.
6. Sole Proprietors avoid paying double tax. You are not required to file a separate tax report. All your profits are taxed as your personal income. You also get the benefit of tax benefits that are exclusively reserved for individuals.
7. Sole proprietors have the authority to make decisions. Since you are the boss, all decisions about the business are in your hand. The decision-making process becomes very fast and efficient.
8. Sole Proprietorship business have a high level of privacy. As the owner of the business, all secrets are known to you alone. Your competitors can only make guesstimates of what happens in your business.
9. It is easy to maintain a sole proprietorship business. You are not governed by the rules and regulations of the Companies Act. You don’t have to keep separate accounting books, hold annual meetings, keep meeting minutes, prepare formal financial statements, etc. In case of sole proprietorship, the identity of the business in not distinct with that of its owner.
10. Sole Proprietorship is a kind of family business. When you decide to take retirement, you can choose a younger member of your family to run the business. Unlike corporations, you are not bound to take the share-holder’s/board’s approval to select the Chief Officer of your business.
Besides the pros attached to Sole Proprietorship, they too have their cons. Let’s look at some of them.
Disadvantages of sole proprietorship
1. Lack of financial control. Due to the absence of corporate governance, it’s difficult to monitor the expenses of the business. There is no one to watch or control your financial behavior.
2. Sole proprietorship businesses have a limited capacity to raise capital. External investors find it difficult to fund sole proprietorship business due to their unstable nature. If your contribution towards capital is low, and you do not meet the debt:equity requirement of the banks, then it is very difficult to source loan/ funding from the lending banks.
3. Their growth potential is limited. Without investors to boost your capital, you lack the advantage of exploring new markets and opportunities. This means that your business can not grow beyond a certain point.
4. Lack of limit to their liability. Since there is a lack of legal distinction between business and private assets, the sole proprietor is responsible for all actions and debts of the company.
5. Inexperienced Employees. Its true that the hiring process in a sole proprietorship business is very simple. Generally, the owner of the person takes the interview of the prospective candidates. However, employees are usually hired without a formal declaration. Hence, chances that they lack the necessary skills are high. This lack of expertise may slow down the growth of the business.
6. Difficulty in hiring employees. Since funds in the sole proprietorship businesses are limited; it is difficult to hire skilled employees. Aspiring candidates prefer to join a reputed multinational corporation. They find little interest in joining a sole proprietorship business.
7. One becomes overworked. In sole proprietorship businesses, all responsibilities fall on the owner’s shoulders.
8. Sole Proprietors rarely go for holidays. It is hard to take a holiday because you are responsible for every facet of the business.
If you plan to set-up a sole proprietorship, you need to understand fully the pros and cons that are involved in undertaking such a business endeavor. When run well, sole proprietorship can be some of the best avenues for an individual to earn income.