While starting a business, most of the solo entrepreneurs choose to start as a sole proprietorship business. The main reason being behind this is less investment and fewer legal formalities to establish and operate the business.
Keep reading to know more about sole proprietorship from its features, advantages, disadvantages, and examples.
What is a Sole Proprietorship?
A Sole Proprietorship is the simplest and one of the most popular forms of business entity. It is a type of business organization that is owned and operated by one individual only. The person who is the sole beneficiary of all the profit, loss, and responsible for the task is known as a sole proprietor.
Sole Proprietor is made up of two words, “Sole” which means “alone” and “Proprietor” means “Owner”.
Also Read: How to Start a Startup [Complete Guide]
The features of Sole-Proprietorship business are:
1. Single Ownership
One person is the owner of the business. That person is liable for every decision associated with the business.
2. Legal Formalities
There is very less legal (formalities) procedure for the formation, operation, and closure of a sole proprietorship business. This type of business doesn’t even need registration to operate.
3. No Separate Identity
There is no separate legal identity for the business and the owner of the business i.e sole proprietorship business and sole proprietor are the same.
4. Profit and Loss Share
All the profit generated from the sole proprietorship business goes to the sole proprietor (owner of the business), in the same way, all the loss incurred in the business is borne by the owner.
5. Business Continuity
As business and the owner has the same identity in the case of this type of business. Any mishappening (physical ailment, imprisonment, insanity, or bankruptcy) with the sole proprietor will directly affect the business.
6. Unlimited Liability
One of the major cons of sole proprietorship business is that liabilities are unlimited. That means, in case of any loss or the repayment of debt the assets of the business as well as the personal assets of self-proprietor can be used to discharge the liabilities on the business.
Advantages of Sole Proprietorship:
The advantages of the sole proprietorship business are:
1. Less Legal Formalities
There are fewer legal formalities for the establishment of the business. Not just for the establishment, these types of businesses don’t require as such any legal formalities for the operation and closure of the business.
2. Quick Decision
A sole proprietor has the right to take any decision regarding business on his own without anyone’s consent or approval. That allows the owner to make the decision fast.
One of the best parts of a sole proprietorship business is that a sole proprietor gets all the profits from the business in his pocket without having to share it with anyone.
Because of a single owner of the business, it allows the owner to maintain the privacy of business information (confidential data).
5. Better Control
Since this type of business is owned by a single person, he/she has better control over the operational work of the business.
6. Fewer Expenses
The sole proprietorship business is usually started at a smaller scale than other business forms. Hence, it involves less capital and operational expenses.
Disadvantages of Sole Proprietorship:
The disadvantages of this type of business are:
1. Unlimited Liability
One of the major disadvantages of a sole proprietorship business is its unlimited liability. As the business and owner are not a different legal entity, that means the liabilities on a sole proprietorship business is also the liabilities of the sole proprietor.
2. Continuity of Business
Any mishappening (illness, bankruptcy, imprisonment, etc.) with the sole proprietor will directly affect business continuity. It may lead to the discontinuity or even closure of the business that depends on the unfortunate incident with the owner.
3. Limited Resources
Due to the single-person operational business, the resources in terms of money, employees, etc. are very limited.
4. Limited Managerial Skills
Sole proprietor solely handles all the business operation, but a single person may not be experts in every field like marketing, sales, finance, etc. which may hinder the growth of the business.
5. Personal Taxes
Any income earned from this type of business is taxed at the rate of an Individual earning tax. As the business grows, the owner may have to pay a higher amount of tax as compared to other forms of business.
Examples of this type of business include Small businesses to personal services like:
Case 1: XYZ started a small retail shop and hired 2 staff to handle the works. Where he pays the staff, rent, and for buying the stocks from his own pocket. This is a perfect example of a sole proprietorship business.
- Small Retail Shops
- Web Designer
- Coaching Classes
- Graphic Designer
- Small Restaurants
- Mechanic Shop