Sole Proprietorship – What Is It Really?

Starting your own business, online or otherwise would require you to take your first step – the step you would take even before creating an online store – and that is, choosing the type of business you’d like to go for. This step would then determine what steps you would take in order to get your business registered.

In this article we will talk about Sole Proprietorship, which is a type of unincorporated business, and one of the easiest ways for you to get your business started.

Being a type of unincorporated business entity, if you register yourself as the sole proprietor of your firm, you will be solely responsible for everything related to your business – from kickstarting your business, to bearing any liabilities against it. Even when it comes to the profits you would make, or the losses that you would incur, there would be absolutely no distinction between you and your firm.

Let’s have a look at some of the features of this Business type:

Features:

Name of Your Business
You can have your business share your own name, or you could give it another name – it is completely a matter of your choice. There are no guidelines that govern this aspect of Sole Proprietorship.

Directors / Partners / Employees / Shareholders
There are absolutely no guidelines on who can be, or how many Directors you can have for your business. Sole Proprietorships, by design, are not legal entities, have no shareholders or stockholders, no partners, and no board members. So unlike an incorporated business, you wouldn’t need to report any board meetings, or anything like that.

You can have as many employees as you would like to have. In addition to that, you could even choose to hire people on a contractual business.

No Double Taxation
Being a Sole Proprietorship, one of the biggest advantages that you can avail of, is only having to file a personal income tax return, and being excused from the burden of double taxation – a disadvantage associated with owning an incorporated business. What Double Taxation means, is that in any type of an incorporated set-up, you will find that other than the Corporate Tax which is levied on the corporation as a whole, the shareholders are also liable to pay taxes on their individual incomes earned from the business. It stems from the fact, that corporations are considered separate legal entities than its shareholders, unlike an unincorporated business.

This alone makes it an absolute favourite amongst the startups.

Liability
What Sole Proprietorship essentially entails, is that every time you have to take care of a business-related debt, you will be personally liable to take care of it. You and your business being one and the same thing in the eyes of the law, there will be absolutely nothing differentiating your personal assets from your business assets. It would also mean, that in case of any damages caused in your line of work, you would have to take personal responsibility towards getting them right.

So, you owe unlimited liability against any debt or damages that would have been limited to your business, had it been a Private Ltd Company, or any other incorporated business. In that case, your company would be the one answerable towards any damages; and for any debts incurred in your line of work, only your business assets would be taken into account instead of your personal assets.

Perpetual Succession
Perpetual Succession or Perpetual Existence refers to the concept of the continuation of an organization despite any reason that the current owner or member can’t continue carrying out his/her responsibilities towards it.

In the case of a Sole Proprietorship, if the proprietor is unable to carry out his business due to retirement, death, or anything else resulting in his/her incapacity to fulfil the contract, the business also terminates. So basically, Sole Proprietorship doesn’t follow the notion of Perpetual Succession.

But in your capacity as the owner of your business, you can sell or transfer your rights and responsibilities towards it, to anyone you would like to. But in the case you do sell or transfer the ownership of your proprietorship to someone else, you will see that the debts of your firm do not get transferred automatically – because they are legally, your personal debts. You will have to get them all settled with your creditors, before you choose to agree to the sale or transfer, because both your personal as well as business assets can be claimed by your creditors in the case of a debt.

Raising Capital
A distinct disadvantage of this type of business, is funding it. Not being considered different from you as an individual, you will see that the sources of investment available to your business are the same that would be available to you as an individual. You could take a personal loan, use your retirement fund in case you have one, or use money from a personal line of credit that you might have to fund your venture.

Again, as a bit of a disadvantage, you will notice that when it comes to invest in your business, you may have to show a few years’ worth of, either personal or business income, to let your creditors believe in your ability to repay the loans.

Registration:
The popularity of engaging in this type of an establishment also stems from the fact that it’s really easy to form. You just need a personal bank account, and register your business as a sole proprietorship at your nearest municipal corporation.

But, instead of operating from your home, if you choose to work from a physical shop, you’ll also need to get registered under Shop and Establishments Act.

Conclusion:

Being one of the easiest ways to get your venture started, Sole Proprietorship offers a host of benefits which are exclusive to this business type. But, you will also encounter certain disadvantages which are unique to this very type.

Hence, you should consider all your options very carefully, and finally decide upon the kind of business you would like to go for.

Vrinda
I am a quirky person who loves to read and eat. I love sharing cool facts and my smile is highly infectious.

Above all... writing is my passion.

9 thoughts on “Sole Proprietorship – What Is It Really?

  • August 1, 2016 at 11:16 am
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    Sole proprietorship is not an easy business. This article gives a very good understanding on this business type. Good read indeed.

    Reply
  • August 1, 2016 at 11:47 am
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    Wow! I din’t know that “no double taxation” was applicable to this business. Definitely one of the perks of being a sole proprietor!

    Reply
  • August 1, 2016 at 3:45 pm
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    It is very true, one must research on the various businesses and decide after analyzing the pros and cons of each!

    Reply
  • August 2, 2016 at 11:00 am
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    I started a partnership firm with another person and realised that i should have done a sole proprietorship instead. Well, this works best when you know for sure that you can manage a business on your own. Partnership leads to conflics between the partners involved and hence sole proprietorship is more advantageous.

    Reply
  • August 2, 2016 at 12:02 pm
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    I always wanted to start my own business. Thank you so much Vrinda for the information that you share in your blogs. They have come in handy in many situations.

    Reply
  • August 2, 2016 at 1:26 pm
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    Every type of company has its advantages and disadvantages. We first need to understand our goals and purposes of the business. This apart, there are various factors that affect how a company shapes up in the future. All these will be helpful in deciding how the company needs to be registered.

    Reply
  • August 2, 2016 at 3:51 pm
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    As a commerce graduate, this article is really simple and easy to understand, would send this link as a reference to anyone who wants to know more.

    Reply
  • August 3, 2016 at 11:12 am
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    Easy and broken down in a way that covers the whole life of a sole proprietorship firm. From initiation to succession and liability.

    Reply
  • August 3, 2016 at 12:26 pm
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    Good language, easily understandable content. Many are familiar with the idea but not familiar with it, indepth. This is a good place to start reading up.

    Reply

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