There are 11 Crore Businesses in the unorganized sector, 75% of them registered as sole proprietors. But, why? You must have learned somewhere that, Sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation. Well, that’s a fact, but the thing that might put you to surprise is even Coca Cola origin owes to a sole proprietorship.
In this article, I am going to jump deeper to help you uncover truths about Sole Proprietors.
The word “sole” implies “only”, and “proprietor” refers to “owner
Sole Proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This form of business is particularly common in areas of personalized services such as beauty parlors, hair salons, wholesalers, retailers, and small-scale activities like running a retail shop in a locality.
Salient characteristics of the sole proprietorship form of organization are as follows:
- Ease in formation as well as the closure of business: There are no legal formalities like a business registration that is required to start a sole proprietary business. In some cases, one may require a license to start. There is no separate law that governs sole proprietorship. Closure of the business can also be done easily.
- Sole proprietors have unlimited liability: This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. That is, in case run out of capital, your personal assets like car, an apartment may be liable for payment of debt.
- Sole risk bearer and profit recipient: The proprietor borne all the risk and as well enjoys all the benefits too. He receives all the business profits which become a direct reward for his risk bearing.
- Management Bandwidth: The right to run the business and make all decisions lies absolutely with the sole proprietor.
- No distinction is made between the sole trader and his business: The owner is, therefore, held responsible for all the activities of the business.
- Lack of business continuity: Since the owner and business are one and the same entity, death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.
Talking of advantages in Sole proprietorship:
- Decision making: There is no need to consult anyone to make decisions, a sole proprietor enjoys a considerable degree of freedom in making business decisions.
- Confidentiality of information: A sole trader is also not bound by law to publish firm’s accounts. Sole decision-making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy.
- Only owner of benefits: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides a maximum incentive to the sole trader to work hard.
- Starting a business with minimal legal formalities: A sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.
Limitations that the sole proprietorship form of organization:
- Limited resources: Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long-term loan to a sole proprietor.
- Limited life of a business concern: Death, insolvency or illness of a proprietor affects the business and can lead to its closure.
- Unlimited liability: A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.
Accounting compliance for sole proprietorship:
- Bank account on your name or firm’s name.
- Professional tax enrolment and registration
- Personal Income tax filing
- In case, you supply goods and services in Ecommerce platforms then you are subject to GST
- In case, you are a supplier that does not have permanent office and your operations are seasonal like fire cracker business in Diwali, you will need GST
- In case, you have an annual revenue of more than Rs. 18 Lakh (or Rs. 10 Lakh for businesses operating from special cities), you will need GST
- In case you are an NRI and supplying goods and services in India, you will need GST
- In case you are a distributor or broker supplying goods and services, you will need GST
- In case you are supplying goods and services in states other than registered state, you will need GST
- In case you are an operating on an Ecommerce model, you will need GST.
Though sole proprietorship suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital. It is best suited for businesses which are carried out on a small scale and where customers demand personalised services.
Note, to maintain the health of your business, follow general accounting principles to monitor the actual cash inflow and outflow from your business.
We Wazzeerians are known to provide you the best reliable advice, we give you all options from economic to benchmark. ‘Get a Wazzeer’ to kick start your sole proprietorship!