When you are solely the owner of a business enterprise, you are called a sole proprietorship. You then become the master and also a servant of your business enterprise. As you are a proprietor, you can hire employees to accomplish the tasks of your organization. In this article, we will understand the sole proprietorship advantages and disadvantages.
You are solely the owner of the assets and accumulated wealth of the enterprise but should also bear the liabilities of the business. If any asset of the firm is damaged then the owner is solely responsible for the loss. Therefore, it is common for many entrepreneurs to form up sole proprietorship registration.
How to start a sole proprietorship firm?
If you want to become a sole proprietorship, then you should produce certain documents such as income proof, address proof, date of birth proof, bank statements, previous year’s income tax and sales tax returns, income proof, etc.
However, registration is not compulsory for the sole proprietors, but having Shops and Establishments Registration along with Sole-Proprietorship Registration assists in opening a current account in a bank. You also should possess a TAN number and a PAN card for ITR Filing as a Sole Proprietorship Firm. So, before commencing a sole proprietorship firm, you should understand the sole proprietor advantages and disadvantages.
Learn Sole proprietorship Advantages and Disadvantages
Advantages of Sole Proprietorship
- Easier to commence
To become a sole proprietor, you need not produce any documents or undergo several legal formalities. But, for filing income tax or sales tax returns, or to protect the goodwill of the business, you should undergo registration.
- Initial Investment planning and decision making
Lump-sum investment is not required to commence a small business as a sole proprietorship. Being a manufacturer, you can simply produce goods in smaller quantities initially. When the profitability of the firm is increasing, you can invest more to increase productivity.
- Independent decision-making power
To establish goals for your business, you can solely devise strategies to earn profits for the organization. You can accordingly hire employees to perform routine different tasks. You are the sole organizer to build teams, appoint staff members, and effectively channelize the resources of the business.
- Benefits for filing income tax returns
You are liable to pay income tax if your income during the assessment year is above the prescribed limit as stated by the Income Tax act. As a proprietor, you are entitled to deductions for incurring expenses such as medical insurance premium, pension funds, rent payment, notified pension scheme, patent royalty, loan repayment, etc.
- Handling financial matters of the business
The proprietor is independently handling the banking and other business transactions. You can deposit or withdraw amounts from your banks solely according to the business requirement.
Disadvantages of sole proprietorship
- Not protected against business liabilities
You should bear the liabilities of the business too as you do not have a partner. You would obviously raise finance to repay debts or plan to increase the productivity of the business from diversified portfolios. But you should independently repay the amount along with interest to the parties. If you become bankrupt, you should even undergo litigations as nobody else is responsible for the loss and liabilities.
- You cannot easily raise funds from various sources
Financial institutions do not easily lend money to them due to unlimited liabilities. If the owner dies or becomes insolvent, then the amount remains unpaid. They are willing to lend money to an LLP as the liability vests with more than one person.
- A sole proprietor cannot easily sell his business
Even if you have considerably earned profits during the year or previous years, the seller should pay the capital gain tax. If the proprietor has undergone loss, then the buyer must solely repay the debts of the enterprise.
- Unlimited liability
Another disadvantage of this type of proprietorship is unlimited liability. When you as a sole proprietor are paying your debts, then the creditors easily examine your personal details such as savings, property details, income, etc. So, you also have to reveal information about personal assets also.
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