Selecting a Business Structure: The Case of Sole Proprietorship
Starting a business begins with developing the business idea and justifying the viability of the proposed business. Also, along with idea development, the owner needs to understand the main characteristics and pros and cons of different business legal structures. In this article, I will focus on sole proprietors being one of the business structures available for selection.
What Is Sole Proprietorship
A Sole Proprietorship comprises two words, ‘ sole’ means ‘one’ and ‘proprietorship’ means ‘ownership.’ A sole proprietorship is a business structure that allows one-person ownership. Under a sole proprietorship business structure pays tax based on personal income tax rates.
Characteristics of A Sole Proprietorship
Deciding on the appropriate business structure may be challenging. Thus, to facilitate your decision, it is prudent to first know the characteristics of each business structure. This article focuses on sole proprietorship starting with knowing the basic definition of sole proprietorship. A solepropriator is :-
- One-person ownership.
- 100% of the profit or loss goes t the proprietor.
- 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.
- Computation of Tax uses individual tax rates.
- The owner signs all business agreements in his or her name.
Business Features that Best Suit the Sole Proprietorship Structure
Not all businesses can operate on a sole proprietorship basis since the business features do not best fit the sole proprietorship business structure. Some of the businesses that best fit sole proprietorship include the following:-
- Small businesses with low profits,
- A Small business with low risk or financial loss possibility,
- Small business with a customer base coming from friends, family members, and neighbors, and
- Small businesses resulting from hobbies to business,
Those wishing to operate businesses on a sole proprietorship basis should consider the above features in their decision-making process.
What are the Advantages and Disadvantages of Sole Proprietorship?
In order to facilitate your decision as to whether you should operate a sole proprietorship business, it is worth knowing the respective advantages and disadvantages as described below:-
- The owner takes a 100% share of the profit
- It is easy to start as there are no complex legal procedures.
- Starting and operating a sole proprietorship does not involve much paperwork.
- Being a one-man entity, there are no hierarchical procedures in operations.
- No paperwork is required if you want to exit your business.
- Many big companies started as sole proprietors because Business owners do not require upfront money or energy to form a business.
- There is no personal liability protection, thus, putting Individual assets at risk if the business is sued or defaulted on a debt.
- There are no tax benefits accrued to a sole proprietor because, under a sole Proprietorship arrangement, the sole proprietor pays income and employment taxes resulting expensive tax structure.
- There high level of informality in sole proprietorship resulting in limited business growth potential for the owners. Thus, you either change the form to formal or refrain from growing.
- There is limited credibility leading to little business growth since, that, 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.
Despite the above descriptions, there are some country-specific requirements that business operators need to get in touch with. Thus, observing country-specific rules and regulations is a must-do task. We advise you also to visit country-specific issues to complement the guide.
In conclusion, sole proprietorship is an attractive option for many entrepreneurs due to its ease of setup and the ability to retain full control over the business. It has several advantages, including simplicity, flexibility, and the ability to keep all profits generated by the business. However, it also has several disadvantages, such as personal liability for debts and losses, difficulty in raising capital, and the lack of continuity if the owner dies or becomes incapacitated. Ultimately, the decision of which type of business structure to choose relies on the individual’s goals and preferences, and the advice of a qualified attorney or accountant should be sought before making a final decision.