Sole means ‘only one’ and proprietorship refers to ‘ownership’. Thus, sole proprietorship, in a simpler sense, means a single person business organization. It is the oldest form of business to exist, dating back to the barter system. When it comes to ease of doing business, no form of business can compete with it.
Be it capital to commence the business or bearing risk or managing the business, each and everything is taken care of by the owner. This form of business does not require any mandatory registration and does not have any government statute. Yet, certain businesses under sole proprietorship do require a government license and registration (GST) to be considered legal.
The registration of a sole proprietorship has been covered under Official Registration of Business in India. So let’s discuss the advantages and disadvantages of a sole proprietor.
ADVANTAGES OF SOLE PROPRIETORSHIP
- Easy Formation and Closure- As it has already been mentioned, there’s no mandatory registration under any law nor does it carry any legal formalities to start a business The same applies to the closure of business as well. However, a license is required for the specific nature of the business. This makes sole proprietorship the most inexpensive form of business, to begin with. Street vendors, hawkers or a small dine-in place all are examples of easy formation and closure.
- Less Capital Requirement- To start a sole proprietorship, a person does not require heavy capital investments. In the initial phase, they can start their business with a minimal amount. If they get themselves registered under MSME (Micro, Small and Medium Enterprises), getting loans from banks also becomes very easy.
- Sole Beneficiary of Profits- The owner of the business does not have to share their hard-earned profits with anyone. They, alone, reap the benefits from their profits. This acts as the biggest stimulant for sole proprietors.
- Tax Benefits- A sole proprietor pays income tax the same as any individual and the business is not taxed. Under the Income Tax Act 1961, an individual does not pay any tax if their income does not exceed a particular limit. This is called the tax exemption limit and beyond this, the tax is levied based on income slabs.
- Flexible Working Hours- Since the proprietors have to manage all the business activities and do not work under someone’s supervision, they can work at times suitable to them. This even allows salaried individuals to start a business as a side hustle.
- Privacy - Unlike a company or other forms of business, a sole proprietorship has no legal obligation to declare its financial reports to the public. As a matter of fact, even the Government of India doesn’t have an entire list of sole proprietors.
- Autonomy in Decision Making - While conducting business, the owner doesn’t need to consult any partner or board of directors to make a decision. Since they manage the business all alone, they have the autonomy to make any decision. This also avoids any clash of ideas or policies which is quite common when a business is managed by more than one person.
- Audit Benefits- An audit of financial reports at the end of the financial year for a sole proprietorship is not necessary. Until the turnover exceeds ₹1 crores for business and ₹50 lakhs for professionals, an audit is completely optional. Similarly, in the case of GST audits, it is optional up to ₹2 crores in turnover.
Looking at the list of advantages, a sole proprietorship may look promising but it carries a list of disadvantages of its own.
DISADVANTAGES OF SOLE PROPRIETORSHIP
- Unlimited Liability- Unlimited liability means that in case a business is unable to pay the debt from its own fund then the owner becomes liable to pay off the business debt from their own pocket.
- Limited Capital- Generally, a proprietor is the sole provider of capital. To start or expand their business, it becomes important to arrange capital out of their own pocket. This forces them to go for credit or loans. In the rural sector of India where informal credit is more dominant, it becomes even more difficult to arrange capital.
- Bank Loans- Banks hesitate to lend a large sum of money to sole proprietors, as the existence of the firm is completely dependent on the proprietor. As compared to any other form of business, getting a loan is more difficult under this form.
- Lack of Perpetual Existence- Unlike a company or a partnership, the existence of the business comes to an end as and when its proprietor passes away. This makes banks and people even more hesitant to invest or trust. Even if the heir of the business inherits it, they may lack the business understanding required, which may result in the reduction of customer trust and brand image.
- Less Scope of Expansion- As most of the business is single-handedly managed by the proprietor, expanding their business beyond a certain limit is very difficult. This puts a limit of expansion which, as compared to other forms, is very limited.
- Lack of Expertise- It is highly difficult for a person to master every aspect of the business. A proprietor may be an expert in financing but may not know about marketing. This limitation puts another obstacle in the success of sole proprietorship.
- Tax Deductibles- Certain tax deductibles such as employee benefits contributions and certain types of insurances cannot be claimed by a sole proprietor.
Even though there are certain shortcomings, companies such as Coca-Cola, Amazon, Google and Flipkart began as sole proprietorships because they carry various inherent benefits. For businesses such as startups or for personalized services or products or where the market is limited, a sole proprietorship is the most appropriate form of business.