What is Sole Proprietorship? Understand the most basic form of doing business
A sole proprietorship is the simplest and oldest form of doing business in the world. The word proprietorship means the owner of a business or property. It is a single individual driven form of organization. This type of business entity is the most sought after way of starting a small business before adopting other complex types of entity structures. A Sole proprietor is technically an unincorporated business owned by a single individual and the business and the individual are deemed as one for tax purposes. Also, the proprietor or the owner is personally responsible for any debts or liabilities incurred by his/her business.
Advantages of sole proprietorship
- Easiest and least expensive to set up and operate.
- You can operate the business under your own individual name as well, no need to register for a business name.
- Ideal for start-ups and self-employed contractors, part time and home based businesses.
- 100% self-ownership and decision making.
- Simple accounting and easy tax and secretarial compliance.
- Deductible business losses against other forms of income, losses can be carried forward as well for tax purposes.
- All business income is treated as individual owner’s income and reported.
- Expenses of cost of doing business are tax deductible e.g. travel, automobile, advertising, even proportionate home expenses if business is operated from home.
Disadvantages of sole proprietorship
- No separation legally. You and your business will be treated as one.
- Exposure to liability, personal assets could be attached if your business is sued for contract failures/breaches or fails financial covenants with lenders. The liability to you personally can be unlimited.
- Business income earned during a year is taxed in the year itself, unlike incorporates where there is flexibility in terms of how and when the owners get paid.
- Possibly difficult to get contracts/deals, since a proprietorship isn’t highly regarded to be legitimate or professional.
- Business valuation could be difficult to achieve given the owners assets cannot be separated from the business at times.
- Customer loyalties rest with the proprietor, succession is often an issue, unless it is an incorporate the faith vests with the company.
While the advantages and disadvantages could be debated, it is true that this is the most sought after style of operating a business at its early stages by individuals especially start-ups.
There are certain compliances that need to however be carried out if you opt for a business name or trade name for your sole proprietorship, which may need registration and other intellectual property filings if you need to secure your trade name or mark.
Thanks & Regards,
Knowledge Base Team
Your virtual accountant