What is a Sole Proprietorship?

Sole Proprietorship (also called sole trader, individual entrepreneurship, or just Proprietorship) is a kind of unincorporated company solely owned by one person. It is the most straightforward legal type of business entity.

It is important to note that, unlike corporations or partnerships, sole proprietorships do not create a legal entity separate from the sole proprietor. That is, who is the sole proprietor or owner? Sole Proprietorship is shared with the entity that is a business. In this way, the business proprietor is completely responsible for all obligations incurred by the company.

The simple nature of a single proprietorship makes this kind of business structure very popular with freelancers, small businesses, and other self-employed people. The initial sole Proprietorship could be changed into a different, more complex business structure, like corporate, when the company expands significantly and hires substantial staff.

Advantages of a Sole Proprietorship

While it’s not complicated, it offers numerous advantages, among them the following:

  1. A simple and cost-effective procedure that is inexpensive and easy to follow

The formation of a sole proprietorship is usually a straightforward and cost-effective procedure. The procedure varies depending on the state, country, or province in which you reside. In all instances, the procedure requires minimum or no charges and minimal paperwork.

  1. A few government regulations

Sole proprietorships are subject to some legal requirements. As opposed to corporations, these entities are not required to invest the time and money to meet government requirements, as financial information is disclosed to the public.

  1. Tax benefits

In contrast to owners of corporate corporations, an proprietor of sole proprietorships is taxed once. The sole proprietor is only responsible for the personal tax on profits made by the company. The entity itself doesn’t have to pay any income tax.

Disadvantages

Possible disadvantages include:

  1. The owner is liable for the entire amount of the property.

Since sole proprietorships do not constitute an entity that is legal in its own right, the business owner is liable for complete personal responsibility for all liabilities incurred by the entity. If, for instance, the business fails to meet its financial obligations, the creditors may demand repayment from the company’s owner, who is required to make use of his assets to pay back any outstanding debts or financial obligations.

  1. Capital raising restrictions

Contrary to corporations and partnerships, sole proprietorships usually have fewer options for raising capital. For instance, a sole proprietor can’t sell an equity stake to get new money. Additionally, the capacity to get loans depends on the individual’s credit background.

Sole Proprietorship vs. Partnership

Small business owners often face hard decisions when starting their own business. Do they want to start their company independently, or will they find other partners to assist at the beginning of their venture? It comes to deciding whether they would like to establish the sole proprietorship route or a partnership.

The Sole Proprietorship can be described as an unincorporated business distinct from its sole proprietor. A partnership is a group of two or more individuals who agree to manage a business to earn the purpose of earning profit.

The Partnership Act governs the Partnership company, and any lawful body doesn’t govern the sole Proprietorship.

In a Sole Proprietorship, the proprietor has the right to the entire business’s profits. However, he is personally responsible for any obligations. In the case of a partnership, every partner is jointly and severally responsible for the entire Partnership’s obligations.

There is always risk in the duration of sole proprietorships as it could end up when the owner dies or retires or if he becomes awkward to manage an enterprise. In addition, the Partnership could be split if one of the Partners quits, dies, or becomes indebted; however, when it is more than two Partners, the Partnership can continue with the consent of the other Partners.

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