Sole proprietorship is when an individual is the sole owner of a business. In other words, that business is the sole property of one individual.
In this kind of structure that owner gets to call all the shots and make all important decisions. They may hire other employees but there will be no other shareholder besides themselves.
With sole ownership and decision making power also comes full responsibility. All liabilities and borrowing of capital is done by the business owner. They can borrow from banks, individuals, or lending societies.
Any profit to the business belongs to the sole proprietor and they have to bear any losses on their own as well.
Since you, the reader, are probably going over this piece to make a decision for your business, we should take a closer look at this type of business structure. The best way to conduct such an analysis is to consider the advantages and disadvantages.
Hopefully, this will help in weighing the good and the bad so you can make an informed decision.
1. Claim to total profits
Sole proprietorship makes the owner a claimant to any profit the business makes. They are not required to share them with anyone. This is possibly the biggest advantage of this style and business structure.
This part is the most prominent at the time of the initial set up. Since there are no other stakeholders, there is a lot less legal work. Of course, the business still needs the required licensing, but it is a major cut down on other legal processes.
Licensing for these businesses will include registration and an export license (if it is an export business) along with any other service license based on the type of service or product it offers.
3. Freedom of choice and decision
Oftentimes partners in business come upon points of differences. While some differences are part and parcel of any business venture, sometimes these can cause deep rifts between partners.
We can take Facebook as an example here. It is one of the biggest companies in the world and one of its founders Mark Zuckerberg has been subject to many controversies. His partner sued him for a larger share in the company and then there were other people like Cameron Winklevoss and Tyler Winklevosswho also claimed that Zuckerberg broke a verbal contract with them.
These kinds of stories and conflicts are not rare or unheard of when there is more than one individual running a business.
4. Tax saving
Sole proprietors have to pay fewer taxes. Companies pay taxes twice: once on the profit earned and secondly on the profit share earned by the partners. Sole proprietor pays tax only once. Income or profit of the sole proprietor is considered his personal income and profit.
5. Access to credit
In sole proprietorship businesses, the owner of the organization takes full responsibility for debts and liabilities. In this type of business the owner’s personal property is part of the business, and can be used as collateral.
In this way, sole proprietors find it easier to be considered for loans, on the back of personal assets, compared to corporations.
In other words, if capital and assets of a sole proprietor and a company are equal, then the sole proprietor will be given priority for loans because the company will be responsible only for its business investment, while for the sole proprietor their personal property and assets are also involved.
6. Simple wrap up
In case the business is facing losses, the owner wants to start a new one, or there is another reason, closing up is a lot more simpler when there is only one owner and shareholder.
When there are multiple parties involved, this process tends to get a lot more complicated and tedious.
1. Sole responsibility to pay off liabilities
Since the profits all belong to the owner in this type of business, so do the losses and any other money related responsibility.
A business, as it grows, tends to take on many liabilities and is indebted to multiple parties. We have discussed before that in this method the owner can use their personal assets to make themselves eligible for loans. This means that should the business not make the kind of profit that is required to pay off those debts, the personal assets of the owner become part of the deal as well.
The owner then, considering the worst case scenario, might have to sell their personal property and assets to pay off their debt.
2. Hard time getting funds for expansion
Expansion is considered a little difficult to plan and sustain because there is only one main stakeholder. It is not just the funds that are hard to gather but also the opportunity.
A group of people together planning for a business and using their resources to make expansion happen are more likely to see it through as compared to an individual.
3. Single perspective
Sometimes in business it is important to get multiple points of view on organization and planning. One party’s weakness can be made up for by the other and vice versa.
When there is only one person who has anything to lose or gain from a business’s failure or success it can be mentally stressful and overwhelming.
When there is money involved, people tent to become a little emotional and also become more cautious (sometimes too cautious). Therefore, this can turn into quite a challenge for one person to take on.
4. Short life span
The chances of such business ventures lasting for a long time are slim. They will barely ever outlive the owner.
Other than this very physical reason, starting a business and then keeping it afloat often proves to be too much work for one person to handle for a lengthy amount of time.
A lot of times the owner might take the business to a certain point and when it begins to grow and becomes too much handle, they will sell it to a willing buyer.
These are the main pros and cons of setting a business up under sole proprietorship. We hope, having read this, you will be able to analyze whether this system will work for you or not.
Sole proprietorship is when an individual is the sole owner of a business. In other words, that business is …