Sole proprietorship is the simplest form of business. A sole proprietorship is where an individual owns and operates a business and is solely responsible for all transactions. The sole proprietor has complete control of the business, owns all assets and profits and is also responsible for any liabilities or debts.
The first step to set up as a sole proprietor is to register your business with the HM Revenue and Customs (HMRC) as an individual. In other words, you are going to register as self-employed.
The simplicity and practicality of sole proprietorship makes it a popular business model. However, it has its downsides too. If you are considering sole proprietorship, then you need to be aware of both sides of the concept to get a complete idea about this business structure. In this article, we are going to provide you with just that.
Let’s start off with the advantages.
Advantages of Sole Proprietorship
Sole proprietors have the following advantages to benefit from.
#1 Ease of Formation
One of the biggest advantages of sole proprietorship is the ease of company formation. Unlike other business structures, the entire company registration procedure for a sole proprietorship involves little paperwork and is a lot less stressful. Additionally, the charges for the company formation are also nominal.
Also Read: Do’s & Don’ts While Setting up a Business
#2 Complete Ownership of Business
A sole proprietor has complete control in every minute aspect of the company. The owner takes all important business decisions on behalf of the company without anyone interfering. Additionally, the owner can decide to transfer full proprietorship of the company to another person at his own discretion.
#3 Complete Profit Retention
Unlike partnerships and other such business structures which are split among co-owners, a sole trader gets to retain the entire profit amount. This has a number of advantages. Therefore, a sole trader can use the profit as and when he requires for any reason he deems fit. For example, the money can be invested in the business to support expansion plans, or it can be utilised to start another company, or for any other reason without having to consult anyone.
#4 Tax Benefits
Filing taxes for a sole proprietorship is easier than that of a corporation. A sole proprietor does not have to file a separate tax report for the company. The income from the business is counted as personal income. Therefore, all business incomes will be listed under the proprietor’s individual tax return. This makes the process less expensive and less onerous than that of other business structures.
Disadvantages of Sole Proprietorship
While benefits seem quite tempting, the risks involved put the owner at a disadvantage. Some of these are discussed below.
#1 Personal Liability
The owner and business are seen as a single entity. Therefore, the owner is held responsible for the liabilities. If the business is unable to cover any debt or losses incurred, then the owner would be required to pay that off by all means. Also, if the company goes bankrupt, then the sole proprietor has to pay back the entire money he owes to debtors out of his own wallet, even if that puts personal assets at risk.
#2 Difficulty in Raising Finances
Growing a business requires funding which a sole proprietorship lacks. Business structures that accommodate investors and shareholders have the luxury to take advantage of newer opportunities of expansion. But sole proprietorship finds it extremely difficult to raise the finances required to back the long-term goals of the business you can also check in with asset based lenders to raise capital. The only way to ward off this problem is by changing the entire business structure.
#3 Loose Financial Management
A single person in charge of an entire company could result in a lack of adept financial management. If the accounts are not handled as minutely as possible, then the company could fall behind on payments. Additionally, all paperwork needs to be maintained efficiently, failing which could result in problems regarding taxes.
#4 Increased Possibility of Dying Out
In a sole proprietorship, the business is considered to be an extension of the owner. Therefore, the business cannot survive without the owner. In case illness or worse, death befalls the owner, the business dies out. Even though sole proprietorship can be sold or transferred, that doesn’t help much since the new owner is not likely to keep it going like before. So the business eventually ceases to continue.
It is important to measure out all the pros and cons before deciding on the business structure that you wish to follow. At the end of the day, it all comes down to the type of business you wish to start.