With the unreliable economic spin of modern time, recounting at least 10 advantages and disadvantages of sole proprietorship is a curious eye-opener for any interested individual in the venture. Sole proprietorship, which also called sole tradership or individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person.
In it, there is no legal distinction between the owner and the business entity. A sole trader does not necessarily work alone and may employ other people. Sole proprietors may use a trade name or business name other than their or its legal name. They may have to trademark their business name legally if it differs from their own legal name, with the process varying depending upon country of residence.
Also, the owner may hire employees and enlist the services of independent consultants. The owner carries the financial responsibility for all debts and/or losses suffered by the business, to the extent of using personal or other assets to discharge any outstanding liabilities.
Thus the owner of a sole proprietorship may be forced to use his/her personal holdings, such as his/her car, to pay the debts. The owner is exclusively liable for all business activities conducted by the sole proprietorship and, accordingly, entitled to full control and all earnings associated with it.
As there is nothing functioning under heaven that is without some merits and demerits, this content will be sharing some of the 10 advantages and disadvantages of sole proprietorship which you may carry with you as you explore the world of business.
Freedom and flexibility of running your business as a sole proprietorship are included in this business structure. The process of registering as a corporation is longer and costlier, and business operations as an incorporated business are also more complicated.
As a sole proprietor, you aren’t restricted to complicated and strict regulations. This is particularly attractive to small proprietors who don’t have the labor to continually ensure these strict guidelines are adhered to and carry them out. Sole proprietors also have all the decision-making freedom.
Simplification of Tax
Taxes as a sole proprietorship are a lot simpler. As a sole proprietor, there are certain tax advantages that come with small business deductions. For a small business that uses their own home as a business base, part of housing costs, including utilities, internet, and such, can be written off. This helps reduce personal taxes and possibly even result in a tax refund when you file your personal tax return. You don’t get this advantage with corporations.
Easy Set-Up Strategy
The simplest business structure and an inexpensive one, sole proprietorships do not require formal registration. Sole proprietors need not notify the business registration at state or federal offices. Hence, the only cost involved is registering the business name, and getting the apt permits or licenses.
No business owner wants extra paperwork, so some people prefer to register as a sole proprietorship rather than incorporate their business. With incorporation, it’s mandatory to file yearly documentation. With less paperwork also comes less overhead costs of a bookkeeper who is familiar with the legalities of incorporation and securities laws.
Simply put, less paperwork means you can spend more time developing your unique business strategy to help prevent any hiccups down the road.
Liberty to Hire
In a sole proprietorship, owners can hire as many staff as required. This will allow the business to grow, reach more people, and have a growing team. However, it is always necessary to keep a watch on the business budget while hiring employees.
The most significant disadvantage of the sole proprietorship is no protection from liability. Every business liability is a personal liability since there is no legal entity concept. So, while the owners have the freedom to control and make decisions independently, they are also solely liable for the business. This liability spans the company and the owner’s assets.
As a sole proprietor, one might take a personal loan, sign a personal guarantee, and put out personal assets as collateral. So, if there is a loan default, the bank can seize the owner’s assets. Hence, appropriate insurance is a must as a precaution.
No Economies of Scale
Large-scale business organizations enjoy large-scale economies as well. That means they can produce more in lesser overhead costs per product. But for sole proprietorships, this is hard to achieve. Hence, the cost of production of sole proprietorships is generally high. So, facing competition from larger organizations becomes quite challenging for sole proprietorship businesses.
It is challenging to raise vast amounts of capital in a sole proprietorship compared to a partnership or company. This form of business runs mainly on personal savings and borrowings made by its owner. Lack of adequate finances can become an obstacle in growing the business.
Limited Management Skills
A sole proprietor is responsible for making decisions single-handedly. So, the limited management skills of the owner are one disadvantage of a sole proprietorship.
The sole proprietor might not have all the skills to manage the business efficiently. Though hiring professionals is possible, budget constraints might still be a problem. Overall, this disadvantage tends to create difficulties in the growth of the business.
A significant disadvantage of owning a sole proprietorship is the challenge of raising capital. Though the setup costs are much lower in a sole proprietorship, it is difficult to finance the business. Because banks mostly prefer to finance established businesses. Also, since the revenue in such companies is more significant, they are considered to have a strong credit history.
In a sole proprietorship, the business is wholly reliant on a single owner’s finances, investments, and credit history. So, banks and other lenders are often doubtful about the repayment aspect.
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