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.
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.
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.
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.
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.