Advantages and Disadvantages of Sole Proprietorship Business Type

A sole proprietorship is a one-person business organisation and one of the simplest ways of doing business. Particularly popular amongst small businesses, one of the distinct features of a sole proprietorship is that it is extremely easy to set up. The sole proprietor has complete control over the business operations, enjoys all profits and is also solely responsible for the liabilities. A sole proprietorship business has many advantages, especially for a small business organisation, but there are risks associated with it too. Let’s have a look at the features of sole proprietorship and how they serve as advantages or present as disadvantages in business operations –

Sole Proprietorship – Advantages

• Easy setup & dissolution

As mentioned above, this feature of a sole proprietorship is also one of its greatest advantages. The owner of the business does not have to create a separate legal entity. Business operations can begin under the same name as its owner by registering the name using personal identity documents such as a PAN card or an AADHAAR card. Similarly, in case of termination of business operations, a sole proprietorship does not have to go through any legal formalities before closing doors.

• Financial benefits

Along with the ease of formation, a feature of a sole proprietorship that acts as an advantage is the capital required for establishing the business. A small business involves a relatively less amount to start off. Also, the individual proprietor’s personal assets and reputation in the market gives a good foundation to the business to start. At the same time, the owner can also enjoy all profits generated by the successful business.

• Decision making

In a sole proprietorship, the owner controls all the activities and enjoys full freedom to make decisions regarding the business operations. One can modify plans and quickly implement decisions without going through partners or a board of directors before doing so. This feature of sole proprietorship makes it easy for the owner to concentrate on business without interference from a third party. A sole proprietorship also enables the owner to maintain the company’s secrecy and have a competitive advantage over competitors.

• Compliances and taxation

As a sole proprietorship business is not legally required to register with any Government authority, the compliances are also very minimal. The owner only has to file income tax returns subject to the taxable income slots mandated by the income tax department. The business organisation also does not have to register or file GST returns or present its financial records to the Ministry of Corporate Affairs unless the annual revenues generated is above INR. 20 lakhs.

Sole Proprietorship – Disadvantages

• Limited Financial Resources

The feature of a sole proprietorship that acts as an advantage also becomes a limitation if the owner is not financially well off. Financial institutions are often hesitant to provide long term loans, and one has to fall back on personal savings and borrowings to raise the money required to start the business. The growth of business operations is also heavily reliant on reinvestment of profits, and thus the decision to expand a business can become a major burden on the owner.

• Risks and liabilities

While the owner enjoys complete command over the business operations, this also means that one becomes personally responsible for all risks. The success of the business operations lies in the absolute involvement of the owner. Lack of experience, disability to make viable decisions, or absence from business activities can lead to loss. In case of the losses incurred by the business, the sole proprietor is implicated in the liabilities and can be forced to liquidate all personal savings, investments, and assets to meet the financial obligations to creditors.

• Not a different entity

While this feature of a sole proprietorship has many advantages, the flip side is that the life of the business depends on the skills, resources and capacity of the owner. Any detachment of the owner negatively impacts the business and may even lead to the untimely dissolution of operations.