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Advantages & Disadvantages of Sole Proprietorship

Advantages & Disadvantages of Sole Proprietorship

Advantages & Disadvantages of Sole Proprietorship

Starting a small business might be difficult since you have to come up with a business plan, attract customers, and deal with both short-term and long-term financial issues. Going through the paperwork, forms, and registration processes required to officially establish your firm can also be frustrating. The benefits of operating as a sole proprietorship might be of interest to you if you’re still trying to decide which business entity type is best for you.

Even though this structure won’t be suitable for every type of business, being a sole proprietor has several benefits for many business owners. This type of business entity is simple to set up, straightforward and involves fewer formalities than other entities like corporations. The benefits of being a sole proprietor are especially handy for one-person businesses, especially if they don’t require a complicated legal or financial structure.

But sole proprietorships have both benefits and drawbacks, so it’s important to understand when the benefits outweigh the drawbacks, especially in terms of personal liability. In order to help you decide whether this entity type is ideal for your business, we have included 10 Benefits and Drawbacks of Sole Proprietorship in this guide. But before that let’s understand proprietorship.

What is a sole proprietorship?

A company which is run, owned, and controlled by one person is known as a sole proprietorship. A Sole Proprietor runs the company alone, face all risks and liabilities, and benefits financially from it. It works fine for independently managed professions like salons or small retail stores.

Independent contractors, artists, developing start-ups, and well-established companies with real storefronts or office space can all be part of sole proprietorship. A sole proprietor is personally responsible for wages, taxes, and the health and safety of employees, but there is no limit on the number of people they can hire.

Sole ProprietorshipFeatures

Key characteristics of the sole proprietorship form of business include the following:

  1. Solitary Ownership–An individual is the owner of a sole trading business. Run entirely at his own risk of financial loss. The sole proprietor manages and provides capital for the business.
  2. Personalization or a shared identity – A sole proprietorship business lacks an independent separate legal entity. The owner is similar to the concern of the business. All the assets of the company are owned by the owner, and he is also responsible for all of them.
  3. Capital – The boss arranges the capital from his or her own personal resources in sole proprietorship. The owner can also look to borrow money from his friends and family if can not rely only on his personal resources.
  4. Absolute Liability: The owner is solely responsible for the debts of the company. In the event that the assets of the business are insufficient to cover the debt, creditors have the right to recoup their debts from the owner’s personal assets as well.
  5. One Man in Charge: The focus of a sole proprietorship is the individual. The only person in charge of the company. He is in charge of all business decisions, as well as hiring all employees and acquiring all material resources. He is not compelled to consult anyone else before making a choice. The sole proprietor may transfer some of his authority to his employees, but he still maintains overall management and control.
  6. Losses and Gains. All business risks and losses, as well as any profits generated by the operations of a sole proprietor, must be assumed by the owner alone.

Sole ProprietorshipAdvantages

  1. Uncomplicated ownership rights

When it comes to sole proprietorship business ownership is genuinely straightforward.  There are no other components such as company officers or registration agents. The sole proprietor is standing for decision-making, handling revenue, and managing other things. The business’s sole proprietor decides how it will run.

In common corporate structures, there are no problems with boards, officers, or other positions as long as part ownership and control rights are not transferred.

In addition, sole proprietorships lack official registration. Therefore, a certain level of freedom and privacy is preserved. Proprietors are free to run their company however they see fit.

  1. Not Many Documents Required:

Particularly if your company is not big, the benefits of becoming a sole proprietor are various. But the main and fundamental benefit of using this business mode is that there won’t be a tonne of paperwork to fill out. Let’s understand it via an example, to conduct business, limited liability companies need to be registered with state’s government. But when it comes to sole proprietorships you do not require state registration just because they become legal business entities automatically when they started opening.

It is important to note that you may need to obtain a company license or permit to comply with state or local regulations. However, there are some initial advantages to being a sole proprietor, including the ability to grow your business significantly faster and with less cumbersome paperwork from the government.

  1. Uncomplicated Tax Calculations

The ease of taxes is another benefit of being a sole proprietor. The tax requirements are relatively straightforward when compared to other business structures. Contrary to other business models, sole proprietors are not required to register for an EIN. They also have the choice to pay workers using their Social Security numbers.

One-person businesses are not regarded as distinct legal entities.  Therefore, business profits or losses are included in the owner’s income tax. The lone proprietors are exempt from filing separate tax returns for both personal and commercial operations. Apart form this, sole proprietors also benefit from specific tax benefits that go along with small business deductions.

  1. Lower Business Expenses

One of the most attractive advantages is that sole proprietorship business structures have significantly lower registration costs than corporations.

  1. As a sole proprietor, you and your business do not have separate legal identities, so you may not always need to register your sole proprietorship. However, if you operate your proprietary business under a name other than your legal name as an individual, you must register.
  2. Many sole proprietors decide to register their business name regardless of local regulations in order to present themselves in the best possible light.
  3. Simplified Banking
  4. One of the next important advantages of a sole proprietorship is simplified banking. A sole proprietorship is the only type of business entity that can operate without a business checking account (Though many of the personal financial protections that come with owning an LLC are invalidated if you operate it without a business checking account.)

You can send and receive payments for your business as a sole proprietorship directly from your personal bank accounts. You are not required to open a business checking account, though you do have the choice to do so if you want to keep your personal and professional finances separate.

You can receive and send payments for your business as a sole proprietorship directly from your personal bank accounts. You are not required to open a business checking account, although you have the option of doing so if you want to make your personal and business finances separate.

Sole Proprietorship Disadvantages

  1. Absolute Liability

Undoubtedly, one of the major disadvantages of a sole proprietorship business is the owner’s unlimited liability. The owner’s personal property may be seized by the courts if the company is challenged. This type of legal action frequently occurs when the owner has unpaid taxes or when he is not repaying his debts.

  1. Decision-making at a higher risk

One of the most significant disadvantages of a sole proprietorship that many people ignore is making the wrong choices. The owner makes the final choice for every corporate function. A sole proprietorship business has no one to help it make decisions. Choosing badly is a big risk for sole proprietorships.

  1. It can be difficult to raise capital.

Perhaps though a sole proprietorship has low startup costs, experiencing trouble raising capital might limit your growth and even temporarily put you in the negative. Due to your personal liability for any business debts, you are also responsible for paying suppliers, overhead, labour costs, and other expenses. One of the biggest problems with sole proprietorships is that the owner’s personal assets are restricted or connected to the business.

  1. It’s more difficult to sell your company.

It is nearly impossible to transfer ownership of a sole proprietorship to another individual because it is by definition associated with a single person. As a result, if you pass away or decide you no longer wish to run your firm, it will no longer exist.

It is not challenging to sell a sole proprietorship, but you will need to take a different approach. You would have to sell your business’s assets rather than the entire company, with everything that goes along with it.

Unless you have established a DBA, or “doing business as,” and have either sold or transferred the use rights to another party, the buyer will not be able to keep your business name in this situation. If you want to leave your company to a successor, you have to follow the same process.

  1. LimitedSkill set

A sole proprietor is in charge of making decisions on his own. So, one drawback of a sole proprietorship is the limited management ability of the owner. The one-person operation could lack some of the abilities required for efficient management. Even if professionals are hired, a lack of money may still be a problem. Overall, this flaw makes it challenging for the business to grow.

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