10 Key Pros and Cons of Sole Proprietorships

10 Key Pros and Cons of Sole Proprietorships

by / Comments Off / 74 View / Jan 26, 2015

There are many types of companies, classified according to the ownership and registration. A business can be sole proprietorship which means that there is only one owner of the business. The owner of the business is the proprietor, the sole executor and the only authority in the business. The proprietor and the business are the same entities. They are not different entities in the eyes of law.

There are many other types of businesses, such as partnership firms, limited liability partnerships, limited liability corporations, private companies having multiple directors and public limited companies or publicly listed companies. There are more innumerable sole proprietorship businesses in the country than any other type of business.

There are quite a few sole proprietorship pros and cons. If you have such a business already then you may already be aware of the advantages and disadvantages. If you are planning to start a business and thus wondering what kind of ownership you would opt for at the time of registration, then you should consider the sole proprietorship pros and cons.

Important Pros of Sole Proprietorships

1. Sole proprietorship registration is the simplest of all. There are almost no restrictions at all. There are very few forms to be filled up with very simple criteria. Depending on the nature of the business, there may be no verification of place or anything specific as such. The local city office or the county clerk’s office can issue such forms and also approve the registration. The fees needed for such registration are almost negligible. However, specific types of license for the nature of the business would be additional costs. You can start a sole proprietorship business in less than a week, often in just two days. The qualifying criteria are almost nonexistent for sole proprietorship businesses, especially in comparison with other types of registration.

2. Sole proprietorship business is the best way forward if you are the only one who would be working or if nobody else would be sharing the responsibilities that you would have. Sole proprietorship would allow you to keep all profits made from your business. You don’t owe any penny to a partner, board of directors or to any shareholders. Everything you make is yours.

3. Sole proprietorship businesses have only one owner who is the decision maker, executor and profit maker in the entire company. Thus, all decisions or business moves are completely under the control of the owner. One doesn’t have to appease to unions, convince partners or pursue the board members to get things moving. If the sole proprietor decides something would be done in the business, then no one can question that.

4. Being a sole proprietor, one can exercise unparallel flexibility. Since one doesn’t have to talk to others, consult others or convince anyone to agree on a certain standpoint, decisions can be taken sooner, decisions can be altered and the business can have unmatched flexibility. Turnaround times are often quicker for sole proprietorship businesses.

5. Sole proprietorship businesses remain relatively free from government interference or bureaucracy. There are less taxes and one can operate in peace without having consistent intervention from certain departments, either pertaining to revenue or union and labor issues.

6. Sole proprietors don’t have to file separate returns. There is no tax to be paid for the business. Income tax of the sole proprietor is the tax for the business, which is because the profit made by the company is accounted for in the income of the sole proprietor.

Important Cons of Sole Proprietorships

1. There are many shortcomings of sole proprietorship businesses, first of which is unlimited liability. The owner of the company or the sole proprietor is accountable and liable for everything that the company does. Since the owner and the business are not separate entities, everything wrong the business does have to be a personal wrongdoing of the owner. All debts of the company are personal debts. All financial obligations or anything illegal that is done by the company is not done by any registered entity but the sole proprietor.

2. Sole proprietorship businesses are often pressed for resources and are fragile. Such businesses are entirely dependent on the sole proprietorship for its functioning. If the owner is sick or is not available, then the business can go kaput. Death or any kind of serious impairment of the owner would mean that the business has no future and it would be shut down. If the sole proprietor is not efficient enough, then the business would not succeed and if the owner is not working effectively then the business has no scope of desirable profitability.

3. Raising capital is a great challenge for sole proprietors. One can use his or her own funds in any way he or she desires, one can borrow from family members or relatives but seeking financing in the market or from banks and financial institutions can be quite difficult.

4. The fortune of a sole proprietorship business depends entirely on the ability of the owner. If he or she goes wrong, then there is no way of getting it right as no one else has the authority or interest.