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.