Advantages and Disadvantages of Sole Proprietorship Business Type

  • Setindiabiz Team
  • June 22, 2023

Advantages and Disadvantages of Sole Proprietorship Business Type

Complete guide on Merits and Demerits of Proprietorship
A sole proprietorship is the oldest and the most common form of business. It is a one-person organization where a single individual owns, manages, and controls the enterprise. Ease of formation is its most significant feature of the proprietorship because it is not required to go through elaborate legal formalities to start it. No law makes it mandatory to register the proprietorship. No agreement, deed, or documents are to be prepared for starting a proprietorship, and the firm’s registration is also not required. However, the owner may be required to obtain a license specific to the business line from the local administration and register its Trademark to secure its reputation. Click here to Startup Your Proprietorship
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Advantages and Disadvantages of Sole Proprietorship

Major Advantages

  1. Easy to Start to Business
  2. Easier to Operate & Control
  3. No profit-sharing
  4. Simple Compliance & Taxation
  5. Higher Privacy
  6. Easy to Windup a Proprietorship Business

Main Disadvantage

  1. Unlimited Liability to Proprietor
  2. Limited Scope of Raising Capital (Funding)
  3. Limited Size & Scope
  4. Higher Tax Incidence
  5. Lack of Continuity After Death of Proprietor
  6. Dispute on Trademark

Advantages of Proprietor Business Type

One of the most recognized benefits of the sole proprietorship is its simplicity and ease of starting and closing if required. The following are the advantages of the proprietorship firm.
Easy to Start to Business: You can start the proprietorship business immediately after the idea of business occurs to you. There is no regulation, which requires any prior registration to start the proprietorship firm. The proprietorship does not have a separate legal identity and is known by its proprietor. Hence a proprietorship business can be started immediately without seeking any registration. The PAN number of the proprietor is used as the PAN of the sole proprietorship. We strongly recommend that the proprietorship business register itself as MSME (Udyog Aadhar) and get the GST Registration. To protect the business name, brand, logo, punchline, etc., we recommend the registration of your trademarks.
Easier to Operate & Control: As a single person owns the sole proprietorship business, the decision-making is fast; the business’s control remains with only one person, who takes all the decisions on his own without seeking the opinion of any other person. Unlike a company where the board makes decisions, where the views of several persons matter, the proprietor can immediately decide for the proprietorship business. Hence it is easy to control and operate a proprietorship firm.
No profit-sharing: The proprietors do not have to share the benefits of their hard work, business idea, and investment. 100% of the profits of the sole proprietorship firm belongs to the owner or proprietor. There is no sharing of benefits in the proprietorship business.
Simple Compliance & Taxation: The compliance requirement is minimum for the proprietorship business compared to all other forms of business type. There is no regulation like The Companies Act, 2013 for companies or The LLP Act. 2008 for LLP, to regulate the affairs of proprietorship. Hence there is no provision or need to file an annual return for the sole proprietorship. The proprietorship’s income is included in the ITR of the proprietor, who pays tax after taking advantage of deductions under section 80C and slab based taxation.
Tax Planning for Sole Proprietorship: As explained, the income tax liability of the proprietorship business is discharged by its owner. Income tax Act provides several deductions (Tax Benefits ) to individuals, which automatically becomes applicable to the profits of the proprietorship business. The following are the tax deductions that the proprietor can claim against the business or professional gains carried under the proprietorship firm.
  1. Investments made by the proprietors under section 80C of the Income-tax Act, such as the contribution of PF, LIC Premium, Investment of tax saving mutual funds and bonds, etc. Please refer to the complete list of investments under section 80C.
  2. Expenses incurred for medical insurance of self, the family of parents under section 80D, etc. see the full list here.
  3. The repayment of the loan for higher education
  4. Payment of rent, Income from Royalty including from patent is exempt
Higher Privacy: For companies and LLP, the MCA maintains a public database where any person can see the details of the companies and LLP. On payment of a nominal fee, the copies of public documents can also be obtained from the MCA. However, in the case of the proprietorship, there is no government database as such.
Easy to Windup a Proprietorship Business: As the starting, a proprietorship does not need any specific registration, the winding of the same is also very easy. However, before the proprietorship is closed, the liabilities and taxes must be paid or settled. All tax registrations and business licenses should be first surrendered before the business is closed.

Disadvantages of Proprietor Business Type

We discussed several benefits of the proprietorship form of business in the earlier section. However, the disadvantages are significant if you wish to scale., following are the indicative list of cons of a proprietary business type.
Unlimited Liability to Proprietor: The proprietor is liable for the losses or liabilities of the proprietorship business without any limitation. It is the most worrying element of proprietorship business, and require your attention. We recommend you assess the risk involved in your industry. The proprietorship business is suitable only when the business activities are such where there is no or minimal risk involved. In the event of Loss, Liabilities, or where the business is ordered by the Court to pay damages, it has to be paid first from the business’s assets and then from the personal assets of the proprietor (Owner).
Limited Scope of Raising Capital (Funding): Every business needs money to scale its operations. Proprietorship lags very poorly on this point. There is no provision to make any person as co-owner or issue equity. Hence the scope of funding is completely ruled out. Another source of funding is the Banks of Financial Institutions. They are also not considering financing the proprietorship business favorably, even if they do give a loan, it is based on the credential and standing of the proprietor. If your business requires funding in the long term, you should consider registering a company.
Limited Size & Scope: A proprietorship form of business is suitable for small businesses with a low scale. It is difficult to expand and scale the business operations in a proprietorship business type, basically due to the inadequacy of capital. There is a government failing to support the proprietors’ claims as these are by and far non-verifiable. Lack of transparency also limits the size and scope of a proprietorship form of business.
Higher Tax Incidence: Generally, it appears that the proprietorship business pays less tax as the proprietor can take advantage of slab based taxation and avail various deductions of personal investment. However, on a closer look, this does not hold good. The tax rate of the Individual in case the income is more than 10 Lakh is 30%. As for a company, it is only 22%, and further, if you register a new manufacturing company, then the tax rate will be only 15%. Please refer to our Guide on Income Tax Rate.
Lack of Continuity After Death of Proprietor: The existence of a Sole Proprietorship Business is dependent on the life of the proprietor. Generally, illness, disability, or death of the proprietor brings an end to the business. The continuity of business operation is, therefore, uncertain. The business run as proprietorship lacks the feature of perpetual succession. On the proprietor’s demise, the business does not transfer automatically, and it requires a court process to be followed. For cases where the proprietor has written a will, the succession is simpler. The only probate of the will of the proprietor is needed. However, if the proprietor dies without leaving a will, it complicates the courts’ deciding things and succession matters.
Dispute on Trademark: As the proprietor, a person invests his time and money in the business and builds a reputation. The business name, logo, and brand of his company is known as a Trademark. The value of a trademark in modern times is well known and does not need emphasis. To understand why you should register your Trademark, click here. After the proprietor’s demise, another big problem is how to deal with the Trademark in a succession plan. To avoid all this, you should consider registering either a One Person Company or a Private Limited Company.

Suitability of Proprietorship Business Type

We can conclude that the sole proprietorship is suitable for small business in case your business is of Low Risk and very less turnover. Hence, the proprietorship is ideal for businesses that involve moderate risk, small financial resources. However, if there is a risk component in the business, one should consider registering a one-person company. Learn More on Proprietorship Registration 

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