Sole Proprietorship

A Sole Proprietorship is one of the informal and unincorporated business forms, the other one being a general partnership. It is the smplest business form that you can set up.

WHAT IS SOLE PROPRIETORSHIP

A Sole Proprietorship comprises two words, ‘ sole’ means ‘one’ and ‘proprietorship’ means ‘ownership.’ Thus, a sole proprietorship is a business structure that allows one person ownership. A sole proprietorship is another form of informal and unincorporated business structure, the other one being a general partnership.   A Sole Proprietorship lacks separation between the business and the business owner.

CHARACTERISTICS OF A SOLE PROPRIETORSHIP

Before you decide to go for a sole proprietorship form of business, please take time to understand the common features of a sole proprietorship. A sole proprietorship business has the following common characteristics:

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  • One person ownership
  • The owner is entitled to up to 100% of the profit or loss.
  • 100% of the debt or risk of default is the owner’s responsibility.
  • The business does not operate as a an entity separate from the powner.
  • Thus, Tax computation is done based on individual tax rates.
  • The owner signs all business agreements in his or her name.

The features show that not all businesses are the best fit for a sole proprietorship business structure. The questionis ‘how do I know that my business is the best fit business for a sole proprietorship’? Here are the features of the best fit businesses for a sole proprietorship.

CHARACTERISTICS OF BUSINESSES THAT BEST SUIT THE SOLE PROPRIETORSHIP STRUCTURE

If your business has the following features, you may think of starting with a sole proprietorship business structure.

  • If youthink of a Small businesses with low profit,
  • A Small business with low risk or financial loss possibility,
  • If you ha a Small business with a customer base coming from friends, family members, and neighbors,
  • Small businesses born as a result of hobbies to business,
  • It is a one man business hence paying tax on the basis of personal income tax rates.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETORSHIP?

Let’s know the advantages and disadvantages of a sole proprietorship to facilitate your informed decision.

Advantages:

  • No money or energy is required up front to form a business. Many big compoabies started as sole proprietorships.
  • Taking 100% share of profit
  • It is easy to start as there are no complex legal procedures to follow.
  • No much paper work involved right from the start and during operations.
  • Being a one man entity there is no hiarachical procedures required in operations.
  • It is easy to exit the business as you may decide to dissolve your business without requiring any paper work.

Disadvantages

  • Lack of personal liability protection: If the business is sued or defaults on a debt, individual  assets will be at risk.
  • Lack of tax benefit: Under sole Proprietorship, the tax becomes expensive since the sole proprietor, depending on the country’s tax rules, pays both income tax and employment taxes.  
  • Limited business growth potentials: Business growth goes together with risks. Thus, you either change the form to formal or refrain from growing.
  • Low credibility: Most formal business operators doubt the credibility of most sole proprietors. Thus, it is rare to find a business relationship between a sole proprietor and a government agency.

These are general rules applicable to the business community all over the world. We advise you also to visit country-specific issues to complement the guide.