What is a Sole Proprietorship?
A sole proprietorship (also known as individual entrepreneurship, sole trader, or simply proprietorship) is a type of an unincorporated entity that is owned by one individual only. It is the simplest legal form of a business entity.
A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. As such, these types of businesses are very popular among sole owners of businesses, individual self-contractors, and consultants. Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.
- A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned.
- Sole proprietorships are easy to establish and dismantle, due to a lack of government involvement, making them popular with small business owners and contractors.
- Many sole proprietorships end up getting restructured into an LLC, in sync with the company's expansion.
- One of the main disadvantages of sole proprietorships is that they do not have any government protection as they are not registered. This means that all liabilities extend from the business to the owner.
Advantages of Sole Proprietorship
- A proprietor will have complete control of the entire business. Thus this will facilitate quick decisions and freedom to do business
- Law does not require a proprietorship to publish its financial accounts or any other such documents to any members of the public. As a result, there is enough confidentiality which is important in the business world
- The business owner derives the maximum incentive from the business. Because he does not have to share any of his profits. So the work he puts into the business is completely reciprocated in incentives
- Being your own boss is a great sense of satisfaction and achievement. Moreover, you are answerable only to yourself. Hence it is a great boost to your self-worth as well
Disadvantages of Sole Proprietorship
- One of the biggest limitations of a sole proprietorship is the unlimited personal liability of the owner. If the business fails it can wipe out the personal wealth of the owner as well as affect his future business prospects too
- Another problem is that a sole proprietor has access to limited capital. The money he can borrow from his own personal savings may not be enough to expand the business. Moreover, banks and financial institutions are also wary of lending to proprietorships.
- The life cycle of a sole proprietorship is undecided and attached to its owner. An incapacitated owner may have a negative effect on the business, and it may even lead to the closure of the business. A sole proprietorship cannot carry on without its proprietor.
- A sole proprietor also has limited managerial ability. He cannot be an expert in all the fields of the business. Furthermore, limited resources may mean that he cannot hire competent people to help him out. As a result, the business may suffer from mismanagement and poor decisions.