Advantages and Disadvantages of “Sole Proprietorship”

What is a “Sole Proprietorship”?

It is a simple type of business structure that is owned and operated by the same person and thus does not involve the complications of the complex filing requirements associated with other types of business structures such as corporations. In sole proprietorship the income and expenses of the business is reported in the name of the owner as individual tax return.

Since they are the easiest form of business which can be started, it is something which excites the small investors. The owner of the firm is the only person entitled for any and every kind of profit and losses occurring to the business. Owner is the only person who is held in case of any legal issues and is responsible for violations committed by the business or its employees.

Advantages of a Sole Proprietorship

Following are some the advantages in case of Sole Proprietorship:

• Ease of formation – Starting a sole proprietorship is much less complicated than starting a formal corporation, and also much cheaper. Some states allow sole proprietorships to be formed without the double taxation standards applicable to most corporations. The proprietorship can be named after the owner, or a fictitious name can be used to enhance the business’ marketing.
• Tax benefits – The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal income, not corporate tax rates.
• Employment – Sole proprietorships can hire employees. This can lead to many of the benefits associated with job creation, such as tax breaks. Also, spouses of the business owner can be employed without having to be formally declared as an employee. Married couples can also start a sole proprietorship, though liability can only assumed by one individual.
• Decision making – Control over all business decisions remains in the hands of the owner. The owner can also fully transfer the sole proprietorship at any time as they deem necessary.

Also Read about Advantages & Disadvantages of a Franchise.

Disadvantages of Sole Proprietorship

Forming a sole proprietorship does involve some risks too. Following are some the disadvantages in case of Sole Proprietorship:

• Liability – The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For example if the business must pay any debts, these will be satisfied from the owner’s own personal funds. The owner could be sued for any unlawful acts committed by the employees. This is drastically different from corporations, wherein the members enjoy limited liability (i.e., they cannot be held liable for losses or violations).
• Taxes – While there are many tax benefits to sole proprietorships, a main drawback is that the owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as health insurance premiums for employees.
• Lack of “continuity” – The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes.
• Difficulty in raising capital – Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do.
• Limited resources – The financial resources of any small entrepreneur as an individual are limited. He mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his capacity. Thus, limited resource is the major drawback of this form of business.
• Heavy Burden – Although making all the decisions can be a benefit of sole proprietorship, it also can become a burden. As the business owner, you’re solely responsible for its success and failure. You also can have difficulty relinquishing control and delegating to others if your operations continue to grow.

It can be very well summed up by the phrase:

“You are the business”

Some of the examples of Sole Proprietorship are as follows:

• Fannie’s Finds (http://www.fanniesfinds.com/17/Home.htm)
• Rustic Inn Crab-House (http://www.rusticinn.com/our_history.htm)