What are the advantages and disadvantages of a Sole Proprietorship?

The most common type of business ownership in the world is the sole proprietorship. As the name implies, it is a type of business in which the assets and affairs of the company are owned by a single individual. This article will focus on “What are the Advantages and Disadvantages of a Sole Proprietorship?”

Before gaining knowledge related to the Advantages of a Sole Proprietorship and Disadvantages of Sole Proprietorship. Let’s have a quick look at “What is a Sole Propritership?”

What is a Sole Proprietorship?

A sole proprietorship firm is a business entity that is owned, controlled and managed by a single person. The owner of the business is called the sole proprietor of the Firm. As the business is run by a natural person, there is no legal difference between the promoter and the business. The promoter himself receives all the profits.

Features of a Sole Proprietorship Firm in India

For most entrepreneurs, proprietorship has always been the favored method of starting a small firm. The major characteristics of this business kind distinguish it from others.

One person is required for proprietorship, which is essentially a one-man performance.

A single individual owns the company.

It is significantly easier to create and dissolve the firm because just one person is involved and there are few legal requirements.

Compliance with tax laws and other laws is lesser as compared to other business structures.

A service provider, a manufacturer, a trader, or a retailer can all employ the sole proprietorship structure.

What are the Advantages and Disadvantages of a Sole Proprietorship?

Below are the points that will help you in Understanding the Advantages of a Sole Proprietorship and the Disadvantages of a Sole Proprietorship.

5 Advantages of a Sole Proprietorship

Deduction under ITR Filing

If your income during the assessment year exceeds the prescribed limit set by the Income Tax Act, you must pay income tax. As a sole proprietor, you are eligible for the deductions for medical insurance premiums, pension funds, rent payment, notified pension system, patent royalties, loan repayment, and other expenses.

Lesser Documentation 

Some people decide to register as a sole proprietorship rather than incorporate their business because they do not want to deal with extra paperwork. Fewer paperwork means you can devote more time to establishing your own business strategy and avoiding potential snags.

Sole Proprietorship is easier to operate

It is easier to function when only one person is in charge because that person will be the sole decision-maker and will not have to evaluate a variety of viewpoints. In a proprietorship firm, there is no such thing as a board meeting or consent from other people, that will make it simpler and easier to operate.

Hustle-free Registration Process

A sole proprietorship business has no special registration procedures, and the business uses the proprietor’s legal identity. As a result, a proprietorship can be established without the need for registration. Udyog Aadhaar registration and Trademark Registration can be obtained using the promoter’s PAN and Aadhaar number to develop and protect the business’s identity.

Ownership is simplified

In terms of business structure, a sole proprietorship is as straightforward as it gets. A single-owner makes all of the choices, accepts accountability, and oversees all elements of the company. This is great for many small business owners because there is little chance of conflict between corporate or partnership owners. Simply said, a sole proprietor does not risk losing control of their business.

3 Disadvantages of Sole Proprietorship

Raising Funds for business is difficult

A sole proprietorship is prohibited from selling business interests or shares, preventing the entity from receiving any sort of equity finance. Furthermore, because the proprietorship firm’s existence is related to the proprietor, banks are reluctant to providing huge sums of money to it. In a corporation or LLP, on the other hand, multiple people are responsible for the liability, and business continuity is guaranteed in the event of one of the promoters’ death or insolvency. As a result, a business or LLP would have an easier time getting a bank loan than a sole proprietorship.

A Sole Proprietorship is difficult to sell

Even if you made a lot of money this year or in prior years, the seller must pay the capital gain tax. If the proprietor has suffered a loss, the buyer is completely responsible for the company’s debts. Due to that at the time of selling a Proprietorship owner’s liability, capital funds and other factors need to be taken into consideration which makes it more difficult to sell.

Increased Tax Incidence

Sole Proprietorship Firm are taxed in the same way that individuals are. As a result, a proprietorship firm’s income tax rate is dependent on slabs. Though the income tax rate for revenue up to INR 10 lakhs is lower than for a company, proprietorship enterprises do not have access to the same perks that an LLP or company does. As a result, forming a company to lower the income tax burden would be more sensible in the long run.