Sole Proprietorship : Meaning,Definition, Characteristics, pros and cons

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Sole Proprietorship definition:

“A business that legally has no separate existence from its owner. Income and losses are taxed on the individual” personal income tax return.” In other words, a sole proprietorship is a form of business which can be started without any legal paperwork or any sort of license. Your business outcome or profit only affect your personal income through which you may be imposed tax on and not on your business.

sole proprietor advantages

Characteristics of Sole Proprietorship

The sole proprietorship is very common in all over the world. Some of its examples are Retailers, Corner shop, Bakery, Book Store, Garments outlet, Shoe Store, Doctor’s clinic etc.

Following are the main features of the sole proprietorship are as follows :

Business Ownership

The sole owner manages and controls all the affairs of the business under his/her ownership independently, without the advice of any other person. He is the planner policies and decision maker for the success of his business. He is all in all for his business.

No Legal Status of the Business

Sole Proprietorship has no separate legal entity from its owner. Owner and business is the same thing in the eyes of law and public, so if the owner is questionable then his/her business will also be questionable. Thus, Obligations of the business must be considered as the obligations of the sole owner. Similarly, a life of the business depends upon the life of the proprietor, he is the king of his business. It means in case of mishaps in the life of sole proprietor, may end the life of the business.

Unlimited Liability

According to legal status, business liabilities must be considered as the liabilities of the owner. Hence, the liability of the owner is unlimited. It means in case of insolvency, personal property of owner can be sold for the recovery of its debt because sole proprietor is all responsible for his/her business and no one else.

Taxation Liability

Being a separate business entity, a proprietor is not required to file taxes under employee identification number but can appoint employees that can countable for the business only. Business income is considered as the personal income of the proprietor for taxation. Hence, the owner is liable to pay taxes to Income Tax Department, if income becomes taxable

Accounting Status of the Business

A sole proprietorship is also known as entity principle. According to this principle, owner and business are two different entities for record keeping purpose. Record of transactions must be kept separately from the personal transactions of the owner, in order to check the true results of business operations.

Secrecy

There are many factors behind the success of a business like production techniques, sales, marketing and distribution strategies etc. The secrecy of business factors is very important in order to remain competitive in the market. Because the ownership is in the hands of a single person, hence there is less chance of opening its secrets. This is the best advantage of a sole proprietor.

Flexibility

A sole proprietorship is very simple to change the nature of business according to change in market trends due to entire control and fewer resources. A sole proprietor can change his/her business nature according to his/her will. For example, a person who is doing the business of garments may involve in the business of groceries at night.

Risk

The sole proprietorship bears all the business risk like one bears all its pain alone. Unlike partnership and corporations, it has less restrictive regulations. A sole proprietor is not bound the charter the business though he is required to register a business name its operations and activities.

ADVANTAGE:

1) you are boss

2) all the profits are only yours

3) any start-up costs are low

4) all your privacy is in your hand

5) establishing and operating your business is simple and really easy.

6) it’s easy to change your legal structure later if circumstances change

7) you can easily wind up your business.

DISADVANTAGE:

1) you have unlimited liability for debts as there’s no legal distinction between private and business assets

2) your capacity to raise capital is limited

3) all the responsibility for making day-to-day business decisions is yours

4) retaining high-caliber employees can be difficult

5) it can be hard to take holidays

6) you’re taxed as a single person

7) the life of the business is limited.

CONCLUSION :

Sole proprietor type of business is best fitted for small size business but can be a milestone for future startups as every huge business start from a sole proprietorship to the larger scenario. A good idea with a strong able proprietor can construct an empire from a scratch level. It is for the new comers into the business world which needs to be transformed slowly into a corporative world of success with the help of trial and error and nurture into a strong competent personality to rule the corporative world. Example, Bill  Gates, Ellon Musk, Mark Zuckerberg. Etc.

By Priya Gupta

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