Considering starting your own business by establishing a sole proprietary concern? Get familiarised with the advantages of sole proprietorship, drawbacks to consider and whether proprietorship is best for your business needs.
A Sole Proprietorship is a type of business organisation in which a single person manages the company. In general, there is no need for registration. This business structure is suitable for anyone who wants to create a business with a low initial cost. The single proprietor/owner has complete control over the business. A single person who wishes to start a business from home or on a premise with a small investment can choose this type of business.
The sole proprietorship is probably the popular form of business among small business owners and aspiring entrepreneurs. Also known as a proprietorship or sole tradership, this is the simplest business type followed by many who want to start small and grow big. The proprietary concern is not only easy to set up and operate but also is a flexible business type.
Here, the owner and business are considered the same as there is no legal distinction between the two, unlike the one-person company (OPC) or LLP. Although the sole proprietor is the only owner in the proprietorship, it doesn’t necessarily mean that there will be no employees in the firm. According to the business’s size and needs, a sole trader might employ, whereas the ownership will only be vested with the individual owner
Now, if you are wondering whether the sole proprietorship will suit your business needs, read this blog to learn about the advantages of sole proprietorship and the disadvantages to consider before setting up your business as a sole proprietary concern.
Advantages of Sole Proprietorship
Sole proprietorship comes with various benefits, and small traders can enjoy these varieties of advantages unlike in any other form of business like OPC or corporate entity. Here are some of the main benefits of this type of entity:
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Single Ownership
As the name suggests, sole proprietary concern consists only of a single proprietor or single owner where there are no partners. So, it can be considered a one-person control compared to the business form of OPC. Full control over the business is vested with the individual owner, and all the business decisions are influenced by the owner.
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No Sharing of Profits
Since there are no other partners or co-owners in the sole proprietorship, the single owner is considered the sole beneficiary of business profits, meaning there will be no sharing of profits. In other business forms like partnership firms or joint ventures, there are two or more partners where the profits are shared as agreed. For those looking to start their own business, the process of sole proprietorship registration online ensures that the single owner retains full control and all profits.
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Minimal Legal Compliances
No applicable laws govern and control proprietary concerns. The sole proprietorship registration is not mandatory where. It is optional, and the decision is in the hands of the owner. Since the sole proprietary concern has no governing laws and is not registered with government authorities like MCA, there will be minimal legal compliance.
The most important compliance a sole trader should mandatorily follow is the filing of income tax returns. Since there is no legal distinction between the owner and business, the income tax is charged based on the ‘slab basis’ like in the case of personal income tax. The slab rate income tax rates vary from each financial year based on the income tax amendments released each year by the official authorities.
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Taxation and Deductions
Taxation for sole proprietary concern is similar to taxation in the case of personal income tax levied on individuals. The slab rates vary based on the income range and the age of the taxpayer.
For a taxable income greater than ₹2.5 lakh, the sole trader must pay income tax and file returns accordingly. Likewise, for taxpayers of 60 years and 80 years or more, ₹3 lakh and ₹5 lakh are the limit, respectively. The sole trader can avail of the benefit of deductions and reduce the overall income tax liability. Here are some of the deductions available such as:
- Payment of rent
- Medical expenses
- Royalty on patents
- Medical insurance premium
- Contribution to PF
- Contribution to specified pension funds
- Deduction for handicapped persons
- Other deductions may be prescribed.
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Economical and Cost-Effective
For starting and setting up of sole proprietary concern, it requires low start-up costs and relatively less time when compared to the incorporation of a company or partnership firm. So, this is not only cost-effective but also effortless and easier to start.
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Effortless Establishment and Operations
One of the vital advantages of a sole proprietorship is the effortless and hassle-free establishment of the sole proprietary concern. Since the identity of the owner and business is the same, the same PAN and Aadhaar of the owner can be used to easily establish the entity. The day-to-day business operations and decisions will be quicker since the single owner is the sole decision maker, and no BOD meetings or partner approvals are required.
Drawbacks of Sole Proprietary Concern
Considering and looking into the disadvantages will be a way to informed decision-making. While considering starting your own business, pay attention to some of these disadvantages, which you may want to avoid or lessen the impact on a successful proprietorship.
1: Higher Taxation Rates
As already discussed, the income tax rates for a proprietorship are the same as in the case of an individual. So, the slab rate income tax rates are applicable, and these can vary based on the income range and age of the taxpayer.
Although the income tax of up to ₹10 lakhs is lower compared to corporate companies, sole traders cannot avail of the benefits applicable to a company. However, the tax liability of a proprietary concern for income higher than ₹10 lakhs is higher compared to the tax liability of a company.
2: Unlimited Liability
This is the primary disadvantage of proprietorship, which is an unlimited liability burden on the sole trader. Here, there will be no sharing of losses, and therefore total business losses burden falls on the single owners. The trader should fulfill the liabilities no matter what, and personal assets come under risk, which is used for discharging the liabilities.
3: Limited Funds and Borrowings
The corporate company or LLP can easily raise loans and borrow money from banks due to the concept of a separate legal entity and the registration of the company with government authorities. Banks may get skeptical about lending money or loans to proprietorships since the existence of this entity is linked to the sole owner.
Conclusion
If observed clearly, it may be noted that the advantages of sole proprietorship outweighed the drawbacks. However, it is the decision of the sole trader which matters whether to decide sole proprietorship is the best business form to consider for starting the business.
If you are planning to start your business, consider both the benefits and drawbacks to make an informed decision. For a hassle-free sole proprietorship and company registration process, hire a professional lawyer from the team of legal experts at “Vakilsearch.”
