Sole proprietorship is a form of business, wherein a single individual is the owner or proprietor of a business organization. He takes all the decisions himself and is also solely responsible for all the transactions carried on by the company. It is a preferred form of business by small business owners. Even in the US, there are many small businesses which are run by individuals. This is because it has various benefits and some of them are listed below.
Ease in Business Commencement
The business can be very easily started if there is only one owner. The legal costs involved in such type of business structure are very low. The paperwork and formalities are also very less. Due to this, many businessmen start as sole proprietors initially and later change the business structure when their businesses grow.
Decision-making power lies with a single person. The proprietor has complete control over each and every aspect of the business. He has full legal and financial responsibility. Hence, there is no question of any kind of conflict, arising due to difference of opinion. This is one of the primary advantages.
Avoidance of Double Taxation
One of the main benefits is that, the taxes to be paid are lesser compared to other forms of business, which have partnerships involved or in case a firm is a corporation. The reason for this is the absence of double taxation in a sole proprietorship firm. Double taxation means that the company and his owner both have to pay tax on the income generated by the business. The company pays the corporate tax and the owner pays income tax. However, in the eyes of the law, the proprietor and his business are considered to be a single entity in sole proprietorship. So there is no corporate tax and owner pays only the income tax.
No Income Sharing
Another advantage is that the owner has 100% right over the income generated through the business. Thus, financial planning becomes hassle free as the income remains in the hands of a single owner and he may keep it with him or re-invest it according to his discretion. The owner may also use the income for non-business purposes or for personal use. The reason for this is that, in sole proprietorship, there is no distinction between business income and personal income.
Reduced Income Tax
In case the owner has just started the business or if it is going through a slump, the proprietor may face some losses. In such a scenario, the owner can deduct his losses from his total income, including the income generated from sources unrelated to his business like interest on shares and sale of property. The income tax a proprietor pays is then calculated on the basis of this reduced income.
Ease in Business Dissolution
The business can be dissolved very easily. The proprietor reserves sole rights to sell his business to anybody. He can also transfer his business on anybody's name. There is no headache of calculating percentages of the sale proceeds to be given to different parties, or conflict related to on whose name the business should be transferred. Thus, financial management becomes easy.
Although all businesses are different and what may be advantageous for one could prove disadvantageous to the other. In sole proprietorship, the owner has full control over the income and the decision-making, but at the same time he also has unlimited liability. Unlimited liability means that in case of a bankruptcy, the owner has to single-handedly bear all the debts or lawsuits, if any. Thus, there are a few risks associated with this form of business structure. Hence, if you are planning on starting a business, and still deciding on the best suited business structure for it, look at both the disadvantages and advantages and then arrive at a conclusion.