Sole Proprietorship

We come across many business forms 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.

Sole Proprietorship- Meaning

A sole proprietorship, also known as the sole trader or individual entrepreneurship, is a business form with no separate legal business entity from its owner. One person owns it and 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 a fictitious name is that it is not presently used by someone else. For example: Look Fab Beauty Salon.

Features / Characteristics of Sole Proprietorship

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 the case of a company. The actions of the owner do not differ from that of his business. Say, Mr. Ajay Awasthi- a sole proprietor, has a cooler at his home and uses 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.

Simple

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 are 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 to be 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 dealing 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:

  1. Choosing a Business Name
  2. Select Business Location
  3. Registering a DBA certificate if starting a business with a fictitious name. (if so required in some states).
Sole Proprietorship

Advantages of Sole Proprietorship

Easy Establishment

There is an easy establishment procedure in Sole Proprietorship with very fewer formalities. When one wants to start his own business, he can do so after choosing a business name and a business location.

Cheap

The costs in a sole proprietorship are minimal, including legal costs. Legal costs, even though involved, are limited to obtaining a license or permits. It involves less paperwork it is cheaper than other business structures.

No assets bifurcation

There is no asset bifurcation as to business or personal assets. Both can be used in one’s business and are treated as the 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

Unlimited Liability

There is the 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 poor credibility or goodwill in the market, it becomes very difficult for him to acquire loans from banks and 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 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 a loss of goodwill and the good impact created amongst the society and the public at large. There is no perpetual existence in this business type like in a company.

Heavy Burden for Big Businesses

For some people, handling a business alone seems harder and riskier if it is widespread or has a huge turnover. So, he then turns it into a different business structure, inviting legal compliances and consequences, higher costs, tax burden, etc. For example, Mr. A (a sole proprietor) has electronic items in his three shops. 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 apply to them, for which Partnership Deed will have to be drawn mentioning many details of the business, etc.

Competition

If there is sheer competition in his area, he may lag behind due to many reasons. The reasons would include weaker pleasing skills to customers, less capital and stock, an outdated supply of goods, higher prices, low goodwill, etc.

Read Advantages and Disadvantages of Sole Proprietorship for more details.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

1 thought on “Sole Proprietorship”

  1. Wow!! this stuff is super helpful as it is so… easy to digest! Thanks so much for doing this comprehensive work and I hope you keep it up. God bless you for knowing your stuffs very well.

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