Sole Proprietorship is regarded as one of the oldest legal ways of doing business in India. Most of the small businesses we see around: Chemists, grocery store owners, garages, doctors etc. are sole proprietorship businesses running around for ages.
There are several inherent advantages in running a business via Sole Proprietorship since the Sole Owner runs a one-person show. He is the Business Owner, and there is no legal difference between him and this business or shop. In fact, there exists no single law which governs a sole proprietorship business in India.
However, there are some disadvantages as well, especially when the business scales up, and revenues increase, or there is a new General Partnership agreement in case a new Business Partner joins in. Before sharing the Advantages and Disadvantages of sole proprietorship business, let us first understand sole proprietorship meaning and how it works.
What Is Sole Proprietorship Business?
A sole proprietorship business is formed in the name of the person. Only one man runs the show, controls the operations, and has a 100% stake in the profits. A sole proprietor is not a legal entity, but a natural person, and there is no legal distinction between that person and the business.
Advantages Of Sole Proprietorship Business
No Need For Company Registration
Sole Proprietorship is the simplest form of business, and there is no need for the business to get registered or incorporated. Since there are minimum legal hassles, the sole proprietorship business is popular in India. There exists no single law which governs the working of sole proprietorship business, but the regular permits and licenses are needed for running the business.
For example, a sole proprietor will need a license under Shop and Establishment Act for running a physical shop/outlet, a trademark registration will be needed in case of a product/services being sold under a brand name, FSSAI license in case of food business and more.
No Need To Make Financial Details Public
A business under sole proprietorship need not make their financial details public or share with anyone. Hence, there is this factor of confidentiality, which sometimes becomes important for a business to become successful.
100% Profits Owned By The Founder
The founder of a sole proprietorship business need not share the profits with any partner or legal entity, and thus, can reap 100% of his/her efforts which they put into the business.
Less Barrier Of Entry
Since there is no legal barrier or hassles of registration, it’s easier to start and operate. Any trade name can be used as the business name unless it doesn’t clash with any other legal brand name.
No GST Registration Required
Unless the annual revenues go above Rs 20 lakh, there is no need to file for GST returns, and no need to upload financial records in the MCA portal.
Again, financial records are confidential and only lies with the owner of the business.
Income Tax Benefits Can Be Availed
Since there is no legal difference between a sole proprietorship business and a sole proprietor for the calculation of tax liability, there can be various ways through which income tax benefits can be availed.
First of all, no separate income tax needs to be filed by the owner of the business, with regards to the business. They can file normal returns, and then exhibit the profits made in the business in that returns itself, but the tax calculation will be made based on individual thresholds.
This way, a sole proprietor can save a lot of money in income taxes. GST registration and GST filing are only necessary in the case of annual revenues becoming more than Rs 20 lakh.
No Audit Of Business
There is no requirement for any periodic audits done of the sole proprietorship business, in case the annual turnover doesn’t meet the threshold.
Such tax audits are only required only for those businesses whose turnover is more than Rs 1 crore, and the GST audit is required in case of an annual turnover of more than Rs 2 crore.
Complete Freedom Of Choice & Decisions
There are no board meetings required, no agreements between partners or partnership agreement required.
The sole proprietor is free to make his/her own decision, with complete freedom of choice.
Disadvantages Of Sole Proprietorship Business
The biggest disadvantage is the risks and liabilities of the business.
Since there is no legal distinction between the owner and the business, all liabilities are also unlimited. Hence, in case of a business failure or investment gone wrong, the liabilities lie with the sole proprietor. In extreme cases, the proprietor can be forced to sell his/her personal assets to make the payments to the lenders. Since the owner gets 100% profits, the owner is also responsible for 100% risk.
Another disadvantage is business continuity. In case of a death, prison or retirement or bankruptcy, the Sole Proprietorship Business also ends, since it cannot be transferred or sold legally.
Difference Between One Person Company & Sole Proprietorship Business
For businesses with one person as the owner, Govt has launched a new company registration category called One Person Company.
4 main differences between a Sole Proprietorship Business and One Person Company are:
- In One Person Company, the owner and the business are separate legal entities, which is not the case in a sole proprietorship.
- There is a limited liability on the owner and is limited to the investment made, which is again not the case in sole proprietorship business.
- Since One Person Company needs to be registered as a business, company taxation policies are implemented, unlike sole proprietorship business.
- Business continuity is possible with One Person Company, as the owner can nominate a legal heir, unlike in sole proprietorship type business.
Planning to start a new business, but still undecided on the structure and registration category? Wish to know more about different Types of Partnership Firms, and compare them with sole proprietorship business and One Person Company?
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