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:
- 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 an entity separate from the owner.
- 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 fit a sole proprietorship business structure best. The question is ‘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 consider starting with a sole proprietorship business structure.
- If you think of a Small business with low profit,
- A Small business with low risk or financial loss possibility,
- If you had a Small business with a customer base coming from friends, family members, and neighbors,
- Small businesses are born as a result of hobbies to business,
- It is a one-person business hence paying tax based on 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.
- No money or energy is required up front to form a business. Many big companies started as sole proprietorships.
- Taking 100% share of profit
- It is easy to start as there are no complex legal procedures to follow.
- Not much paperwork is involved right from the start and during operations.
- Being a one-man entity, there are no hierarchical procedures required in operations.
- It is easy to exit the business as you may decide to dissolve business without requiring any paperwork.
- Lack of personal liability protection: Individual assets will be at risk if the business is sued or defaulted on a debt.
- 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.
CPA. Dr. Seraphia Mgembe