Last Updated on March 8, 2021 by Filip Poutintsev
Let us first begin by understanding the two terms ‘sole’ and ‘proprietor’. Sole means single and proprietor means owner. By definition given by J.L Hensen, it is the type of business unit where a person is solely responsible for providing the capital for bearing the risk of the enterprise and for the management of the business.
Table of Contents
- Understanding Sole Proprietorship
- Advantages of a Sole Proprietorship
- Disadvantages of a Sole Proprietorship
Understanding Sole Proprietorship
For instance, let’s take an example of Mrs. X, she loves cooking and has a degree in culinary arts, but instead of joining any restaurant as a chef, she decided to open her own kitchen. So she decided to provide dietary food instead of a regular meal which attracted many fitness freaks all on her own.
Many people get confused about this, but let us be clear that sole proprietorship can have multiple people operating the business, but it must have only one sole owner.
Advantages of a Sole Proprietorship
1. Easy to Form and Dissolve
It is considered to be the most basic and simplest form of business organizations and very few or no legal formalities are required to establish a sole proprietorship. It can also be dissolved without legal formalities by settling all the debts.
2. Direct Incentive
There is a direct relationship between the efforts put and reviews received. So sole proprietorship entrepreneur can put extra efforts to gain an extra income which encourage them to work more to get additional rewards.
3. Sole Profit Receiver
If you own the business and it really takes off and is really successful then all the profits will be yours. You don’t have any business partners or investors to split the part of your profit so if the business is successful you make more money.
4. Total Business Control
You don’t have to share any decision-making process with partners, and you should not be accountable for decisions made by your partner or investors. So you have complete control over the management and decision of business.
5. Tax Advantages
In a sole proprietorship firm, the owner should only pay tax once as tax for their individual income. When your business is a corporation, tax is taken twice, once as your corporation and another as your personal income. So in this matter, a sole proprietorship is beneficial.
6. Source of Employment
Sole Proprietorship can employ others and grow their business. For example, an extra worker in a salon can be a good example of an employee of a sole proprietorship. Even a family member can work for the sole proprietorship entrepreneur without necessarily being called employers.
There is high privacy in sole ownership sort of business. In a sole proprietorship, there is just a single individual who deals with the entire business. All insider facts and issues of business are known to him.
There is no possibility of leakage of business secrets to contenders. This security empowers to contend effectively with contenders to achieve a preferred position.
8. Direct Relationship with Customers
This is one of the significant advantages of the sole ownership business. This component assists with keeping up long haul and a great connection with clients. Vender meets legitimately with their clients in this type of business. It helps in better understanding their interest and serving them better.
Disadvantages of a Sole Proprietorship
1. Business Continuity Problem
If you are the only one running the business, then the business will be there only if you are there. So if you are sick or on vacation, the income won’t be generated.
If you have built your business and it holds value for you, then it might not remain the same after your demise. For example, if you are the only person who is skilled for a particular task of your particular business, then the business may not remain the same when you leave.
2. Limited Managerial Ability
Even though a single owner has control over the management of the business, sometimes it becomes exhausting to manage everything buyout own. There are a lot of activities to be covered while running a business such as marketing, sales, operations, etc and an individual cannot be expected to be an expert in all of these.
3. Limited Capital
An individual cannot contribute capital beyond a certain amount so they might have to take financial aid or loans which can be a burden to them if the business doesn’t pay off well.
4. Unlimited Liability
The liability of the owner is unlimited for a sole proprietorship. For instance, if the business goes in loss and if the business liabilities can not be paid out of business assets then the owner has to use their personal assets to pay off the liability. This may prevent the owner to take the chance of expanding business.
5. Not Suitable for Large Scale Operations
As we have mentioned it earlier that sole proprietorship entrepreneur may have limited expertise and limited capital, so it is not suitable for large scale operations.
Like every other business, sole proprietorship has its own benefits and drawbacks. It is all about an entrepreneur to consider various factors and do an in-depth analysis before deciding anything.