What is a Sole Proprietorship?
A sole proprietorship is a business structure that is managed and operated by a single owner. It is different from other business structures with more than a single owner, such as partnerships or companies. A sole proprietorship is the most basic business structure. Usually, this structure provides a base for more advanced business structures.
Sole proprietorships do not constitute a separate legal entity, unlike other business structures. Therefore, the single owner is fully liable for the business’s liabilities. The sole proprietor has the benefit of receiving all the profits earned through the business. Sole proprietorships are a prevalent business structure for freelancers, small businesses, stores, etc.
How does a Sole Proprietorship work?
A sole proprietorship starts with a single owner that creates a business structure. This structure only includes a single owner, unlike other advanced businesses. The owner invests their capital into the business and uses their expertise or past experience to run it. The sole proprietor is also usually responsible for the daily running of the business’s operations.
Sole proprietorships start as small businesses. However, the owners may choose to expand them in the future. As the business size increases, the owner may hire employees to help run the business. However, there is a limit to how much these businesses can expand. Usually, business owners don’t need to go through the legal compliance applicable to other business structures. However, sole proprietors still have to pay taxes.
What are the advantages of a Sole Proprietorship?
Despite the basic structure, sole proprietorships can have many advantages for entrepreneurs. Some of these advantages are as below.
- Sole proprietorships are simple to set up.
- Usually, there are no requirements for a sole proprietor to register their business in various jurisdictions.
- The sole proprietor can take prompt decisions when needed without waiting for other partners’ or directors’ approval.
- The owner has full right to manage and operate the business any way they want.
- Sole proprietors can sell their business or transfer its assets and liabilities to another party.
- Sole proprietorships provide the basis for expansion to a partnership and company business structure in the future.
- Usually, sole proprietorships have fewer administrative and legal compliance to deal with compared to other businesses.
- Sole proprietors have to pay taxes on their income once.
What are the disadvantages of Sole Proprietorships?
Sole proprietorships may have many advantages. However, they also come with some disadvantages due to their limited size. Some of the disadvantages of the sole proprietorship business structure are as below.
- One of the most prominent disadvantages of a sole proprietorship structure is the limited capital opportunities.
- Sole proprietors cannot raise capital easily compared to other business structures.
- Sole proprietorships have a limited scope due to the single owner.
- Sole traders have to bear unlimited liability in their business, causing them to compensate debtors from their personal assets in case of insolvency.
- Sole proprietorships do not have perpetual existence; therefore, the business may die when the owner leaves.
- Usually, a sole proprietorship and its owner are indistinguishable. Therefore, the owner’s personal life can affect the business as well.
A sole proprietorship is a primary business structure that is run and managed by a single owner. The sole proprietor is responsible for the business’s liabilities. Unlike other business structures, sole proprietorships do not constitute a separate legal entity. Therefore, they come with unlimited liability for the owner.