A sole proprietorship is a business that can be controlled and owned by an individual. Starting up as a sole proprietor requires no legal processes. Any profit made after-tax belongs to the owner. The owner has all authority and decision-making freedom. One of the key advantages of operating a firm as a sole proprietor is independence. Typical examples of sole proprietorship include a local restaurant, a local construction firm, a barber shop, a laundry service, and a local clothing store.
Understand The Sole Proprietorship
The performance of the business must be fully accepted by the sole proprietor. The stress of this responsibility may be far higher than that of any employee’s responsibility. Additionally, sole entrepreneurs must be open to working flexible hours. They are on call at all times and may even have to substitute for a sick employee. They are motivated to keep an ongoing eye on how the business is doing since they are responsible for its success. Sole entrepreneurs must exhibit strong leadership skills, be well-organized, and communicate well with employees.
Many successful sole proprietors have previous experience in the industry in which they now compete, maybe as an employee of a competitor. For instance, restaurant managers frequently open their restaurants. Prior experience is critical to understanding the competition and the behavior of customers in a particular market.
Advantages of Sole Proprietorship
Ease and Low Cost of Formation. This is relatively easy and inexpensive to form a sole proprietorship. In some cases, creating a sole proprietorship involves merely announcing the new business in the local newspaper. The legal requirements are minimal. A sole proprietorship does not need to form a separate legal entity.
Secrecy. Sole proprietorships make possible the highest level of confidentiality and secrecy. The proprietor, unlike the owners of a partnership or corporation, does not have to discuss his or her operating plans with other partners or the public, minimizing the possibility that competitors can obtain trade secrets. Financial reports do not need to be disclosed, unlike those of publicly owned corporations.
Distribution and Use of Profits. In a sole proprietorship, the owner is the single beneficiary of all profits. They do not have to share them with any partners or stockholders. The owner chooses how to allocate the funds: for business expansion, for wage raises, for travel to find new clients, or to buy more inventory.
Greater Flexibility and Direct Control. The business is entirely in the sole proprietor’s authority, and decisions can be made immediately without involving anyone else. Due to this control, the owner can act rapidly when the business environment becomes more competitive or when the economy changes.
Ease of Government Regulations. Sole proprietorships are independent of government regulation. Many government regulations – federal or provincial- apply only to businesses that have a certain number of employees, and securities laws apply only to corporations that issue stock. Nonetheless, sole proprietors must ensure that they follow all rules and regulations of law that apply to their business.
Lower Taxation. Profits from sole proprietorships are taxed at individual tax rates rather than the rates applied to various other types of business ownership since they are considered personal income. As a result, the owner just has to pay one income tax, which covers both business and personal income.
Ease of dissolution. A sole proprietorship can be dissolved easily. There is no need for the approval of co-owners or partners. The only legal condition is that all financial obligations must be paid or resolved.
Disadvantages of Sole Proprietorship
Along with its advantages, there are many disadvantages of sole proprietorship in following:
Unlimited Liability. The sole proprietor is held completely responsible for paying the business’s debts. In other words, the owner can be forced to utilize personal, non-business assets like a car or a home to settle the debts by bankruptcy regulations if the business is unable to pay its creditors. The disadvantage of unlimited liability increases with an individual’s level of wealth.
Difficulty in raising funds. Among the relatively few sources of money available to the sole proprietorship are banks, friends and family, or his or her funds. The owner’s financial condition determines his or her credit standing. Additionally, sole proprietorships may have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered at greater risk of default.
Often, the only way a sole proprietor can borrow for business purposes is to pledge a car, house, other real estate, or other personal assets to guarantee the loan. If a public company goes out of business, the owners do not lose personal assets as their liability is limited to their shareholding.
Limited skills. The sole proprietor must be able to perform many functions and possess skills in diverse fields such as management, marketing, finance, accounting, bookkeeping, and personnel management. Specialized professionals, such as accountants or attorneys, can be hired by businesses for help or advice.
Frequently Asked Questions
What is sole proprietorship and examples?
A sole proprietorship is a business owned and operated by one person or a married couple. Businesses that operate as sole proprietorships are the most prevalent type. In addition to being simple to set up and administer, this type of business can benefit from greater managerial freedom, fewer legal limits, and reduced taxes.
What are the characteristics of sole proprietorship?
Sole proprietors have total authority over their company. They are not corporations and do not have partners (unless the proprietors are a married couple). A sole proprietorship does not distinguish between the individual and the company. The owner is responsible for paying all taxes and legal fees.
Who is called a sole proprietor?
A sole proprietorship, also known as a sole trader or a proprietorship, is an unincorporated company with only one owner who is responsible for paying personal income tax on the business profits.
Why sole proprietorship is better than a partnership?
Sole proprietors have a larger financial incentive and greater ability to accumulate personal wealth than partnerships, which divide profits among partners. In addition, compared to partnerships, sole proprietors have fewer administrative and legal constraints.