A sole proprietorship, sometimes called the sole entrepreneur, individual entrepreneurship or partnership, is a kind of business in which there exists no separate legal entity and where the sole proprietor acts as sole proprietor. The sole proprietors can take charge of the business only for the services they render. They are the sole shareholders and have no partners or joint ownership in the business. This makes them liable for the profits, losses and debts of the business. In other words, a sole proprietorship is the most dangerous form of business for the reason that they are solely responsible for their own profits, that is, if something goes wrong.
On this page, you’ll learn about the following:
Why Set Up a Sole Proprietorship
The sole proprietorship is often created to avoid paying debts. When an entrepreneur creates a sole proprietorship or passes through sole proprietorship there arises two questions: one is whether the debts of the business will be paid and the second is whether the profits of the business will also be paid. If no debts are paid then the sole proprietor has lost his freedom to choose what he will do with his profits. The only way the owner can pay off debts is to give the debts to someone else who will hold them against the profits of the business. This means that the owner will lose control of his business in this way.
Things to Consider When Establishing Sole Proprietorship
The main risk posed by a sole proprietorship is that the owner does not become interested in his business all of the time. There are many reasons for this. It may be because he is busy studying or learning. It may be because he is absorbed in other things and it may even be because the owner is scared of losing control of his business and thus of losing all his profits. To escape these kinds of situations sole proprietors should create legal entities separate from themselves.
A sole proprietorship should have one personal asset. This is its only asset and it is its only legal entity. That means no debts, obligations, interests or other charges will come against the sole proprietor. So the sole proprietor will not need to provide any guarantee to anyone.
But there are certain situations when a sole proprietor is personally responsible for his debts. If the sole proprietor takes money and does not use that money properly and repayments do not reach the shareholders then the company may be sued. If the sole trader fails to make deliveries to clients in time then the company is liable for the deliveries and the goods themselves. All this is possible when the sole proprietor is personally responsible for the company’s debts.
Sole proprietorships are very simple in structure. They are simply registered corporations and they can incorporate themselves. However, for the start-up costs the start-up fees for small business owners is almost always included. So the sole proprietorship is actually a business structure that you do not have to pay for at the start-up stage of your business.
Pros and Cons of Sole Proprietorship
There are several advantages of sole proprietorships. One of the most important advantages of sole proprietorships is that they are very flexible. The small business owner is in control and he decides which aspects of the business will be dealt with by him and which will not. He can set his own rates and determine how many employees will be allowed to work under him. He can also choose what tax structure will apply to his business and how he will comply with it.
There are also some disadvantages of sole proprietorship. One of the disadvantages of sole proprietorships is that they can create a situation where the owner can take all the profits without giving back anything to his shareholders. His profit margin will depend on his profit scale and how he plans to distribute his income earned. The expenses incurred during operation may not be included in the profit and loss account and hence the owner will have to make sure that he reports these expenses in his profit and loss statement.