Sole Proprietorship

What are the Characteristics of a Sole Proprietorship

A sole tradership, commonly referred to as a sole proprietorship, is a straightforward business form where one person manages and owns the whole company. This brief guide outlines the meaning, important qualities, and everything that identifies a sole trader

Meaning of Sole Proprietorship 

A self-employed individual who owns and manages their own company as individual is known as a Sole Proprietorship. Because a sole trader business lacks a legal status apart from its owner, many people believe that you are the business. 

As a single proprietor, you have exclusive control over your company’s assets and income after taxes. Along with this control, this business model provides relative simplicity, adaptability, and a variety of additional benefits.

A sole trader, unlike the proprietors of a limited company, is personally accountable for their business’s obligations, and their personal wealth may be at stake if creditors are not paid. This unrestricted liability, as well as the strain of having to carry all of the obligations, can pose considerable issues.

Characteristics of Sole Proprietorship

1. Complete the command

As a sole proprietor, you own and control your whole firm. You are totally in command of a wide variety of company choices, from how your functions are managed to how you wish to expand your firm or spend your earnings, and you do not need to confer with the directors or shareholders of the company before making a decision.

2. Consistency

This connects to the previous point. A single trader is dependent on its owner since there is no legal separation between the individual and the firm. Depending on the owner’s situation, such as illness, retirement, insolvency, or jail, the firm will cease to exist.

3. It is not a distinct legal entity

As a single proprietor, you and your firm are treated as one and the same. Because there is no independent legal identity, you will be held accountable for any transactions and acts in which your firm is involved.

4. Indefinite liability

Sole proprietors are fully liable for any business obligations. There is no maximum amount of debt for which a single trader is personally liable, and as a result, your assets may be confiscated to compensate for business losses.

5. Individual taxation

On taxable business earnings, you pay income tax rather than corporation tax. You must additionally register for GST if your company’s annual revenue exceeds the existing GST level of  ₹20 lakhs(for the fiscal year ending in 2021/22).

6. Privacy

As a sole trader, you have more privacy since you don’t have to disclose your confidentiality reports to any government authority. Unlike private limited company directors, you are not obligated to disclose your firm’s accounts or data on the Income Tax portal.

7. Few administrative and filing obligations

Operating as a sole proprietor requires little documentation. Sole traders are not obliged to file accounts or other papers with Companies House, save from your yearly Self Assessment tax return. Remember that you must still keep track of your company costs and income to file your tax returns.

Advantages of Sole Proprietorship Concern

Some of the advantages that sole traders enjoy are:

Quick Decision: A sole proprietor may quickly make business judgments based on experience and efficiency. He does not need to contact anyone to make judgments; therefore, decisions in a solitary trading firm are swift and prompt.

Simple to start and close: A Sole Proprietorship concern is managed,  owned, controlled, and invested in by a single individual who may simply form and terminate it anytime he or she likes. There are only a few simple legal requirements to create and close a business.

Personal supervision and control: Because the sole proprietor acts as both manager and owner, he can easily maintain and create personal and commercial relationships with all interested parties, such as customers, suppliers, workers, and so on, which contributes to the goodwill of the business.

Secrecy: Maintaining the confidentiality of company matters is critical to achieving the desired results. A lone owner is solely responsible for his firm, and because he is not obligated to publish financial accounts, he can preserve strict commercial confidentiality.

Flexibility: The single trading company is adaptable. The owner has more freedom to operate his firm as a sole proprietorship. He may invest additional capital and take money or commodities. Flexibility enables him to capitalise on a positive scenario.

Disadvantages of Sole Proprietorship Concern

Disadvantages that sole traders have to face are :

Limited managerial ability: It is run by a single proprietor who may lack suitable administrative and technical capabilities. As a result, it may suffer from a variety of administrative shortcomings.

Limited capital: Its equity is restricted due to a single owner’s investment. Such a little amount of capital is insufficient for big manufacturing and marketing of goods and services.

Unlimited liability: The sole trader has unlimited liability with regard to his company capital. If the business’s assets are insufficient to cover its responsibilities, the owner may have to sell some of his personal property in order to pay them.

Expansion potential is limited: It has limited capacity for future growth and development. Its operations cannot be diversified due to a lack of money and managerial expertise.

Uncertain existence: Its life is inextricably linked to the owner’s life. As a result, it can be terminated at any time owing to the owner’s death, insanity, insolvency, or incapacity.

The simplicity of a single tradership is one of its most enticing features. It is required to sell and purchase services or products.  There is no legal filing or event required to establish a sole proprietorship. It is a title that develops organically as a result of one’s business actions.

Conclusion

If you run your firm independently, choosing a single tradership over other business structures might save you money and time. As they’re always one-person businesses, single tradership is the best solution for many people’s businesses. Remember that if you want to expand your business gradually, you may always start as a sole trader and then change business types as you gain competence and begin to earn revenue. VakilSearch may assist you if you’ve settled on a business plan but aren’t sure what to do next.

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