There are many business forms we come across in today’s world like a partnership, Joint Venture, Limited Liability Partnership (LLP), etc. Here, we shall discuss one of the most seen and adopted forms by many i.e. Sole Proprietorship.
Table of Contents
- 1 Sole Proprietorship- Meaning
- 2 Features / Characteristics of Sole Proprietorship
- 3 The requirements of Starting a Sole Proprietorship
- 4 Advantages of Sole Proprietorship
- 5 Disadvantages of Sole Proprietorship
Sole Proprietorship- Meaning
A sole proprietorship also known as the sole trader or individual entrepreneurship is a business form which has no separate legal business entity from its owner. It is owned by one person and he himself is personally liable for his debts or liabilities. He is the one who manages, looks after and controls his business. He is to pay taxes on the income generated by him. There is very less government intervention and lesser compliance. The business name is necessarily of the person’s but can also be a fictitious one. The only thing to take care of fictitious name is that it is not presently used by someone else. For example: Look Fab Beauty Salon.
Features / Characteristics of Sole Proprietorship
No Separate Legal Business Entity
The noteworthy point of a sole proprietorship is that there is no separate legal business entity. It means that it is not separate from its owner like in case of a company. The actions of the owner do not differ from that of his business. Say, Mr. Ajay Awasthi- a sole proprietor is having a cooler at his home and is using the same in his shop. Here, Mr. Ajay’s cooler is not bifurcated as a business or personal asset even though it is his personal asset.
A sole proprietorship is a simple form of a business wherein one person can start his business with very few steps. The formalities involved here is to register his Business Name with a local authority unless there is an issue associated with the duplicate fictitious name.
Owned by one person
There may be one or more persons carrying on a sole proprietorship. The owner may hire two-three persons according to his convenience. But that does not mean that it turns out a partnership. The sole ownership is of the owner only. It simply means that the owner has hired those persons as employees, workers, helpers, etc. When dealt with a partnership, there are two or more persons compulsorily to begin a partnership as partners with an agreed profit sharing proportion holding an unlimited liability. Whereas here, only the owner is responsible for his debts, profits/losses earned by him and then he disburses it to his hired persons as per his desire.
The requirements of Starting a Sole Proprietorship
There are different laws in different states. But when in general spoken about the registration obligations, there are two things required to legally start a sole proprietorship business:
- Choosing a Business Name
- Select Business Location
- Registering a DBA certificate if starting a business with a fictitious name. (if so required in some states).
Advantages of Sole Proprietorship
There is an easy establishment procedure in Sole Proprietorship with very fewer formalities. When one wants to start his own business, he can do it so after having chosen a business name and a business location.
The costs in sole proprietorship are minimal including legal costs. Legal costs even though involved, is limited to obtaining a license or permits. As it involves less paperwork, it is cheaper compared to other business structures.
No assets bifurcation
There is no asset bifurcation as to business or personal assets. Both can be used one’s business and are treated as owner’s assets.
Full Control and Ownership Stake
The entire share earned by the owner is his. Whether there is profit or loss, he himself is the owner.
Disadvantages of Sole Proprietorship
There is an unlimited liability of the owner. When the owner has to pay the liabilities, he pays off from his own pocket. When he hires his persons, he is to give them their share of income only. Else everything is of the owner and he is to only, deal with it.
Difficulty in raising money
When the owner has a poor credibility or goodwill in the market, it becomes very difficult for him to acquire loans from banks, institutions. The banks will hesitate to lend money as there would be no assurance of its repayment.
Owner’s Death is the Business Death
Unless there is a clarity from the beginning as to who will continue the business after the owner’s death, the business also dies once the owner dies. This may lead to loss of goodwill and the good impact created amongst the society and public at large. There is no perpetual existence in this business type like in a company.
Heavy Burden for Big Businesses
For some persons, handling a business alone seems to be harder and riskier if it widespread or having a huge turnover. So, he then turns it into a different business structure inviting legal compliances and consequences, higher costs, tax burden, etc. For an example, Mr. A (a sole proprietor) is having his three shops of electronic items. Presently he is the only person managing these all shops. Now, if he decides to form a partnership with another person say, Mr. B, then he will have to give him an agreed share mutually decided by both of them. Also, The Indian Partnership Act, 1932 will be applicable to them for which Partnership Deed will have to be drawn mentioning many details of the business, etc
If there is a sheer competition in his area, he may lag behind due to many reasons. The reasons would include as to weaker pleasing skills to customers, less capital and stock, an outdated supply of goods, higher prices, low goodwill, etc1–3