Advantages And Disadvantages Of Sole Proprietorship

Let's get straight to the point: what is a sole proprietorship? It's as straightforward as this - a business solely owned and managed by one person. This person handles everything, though others can work in the business too. But remember, there's only one boss in the house. All ownership lies with that one person.

There are many advantages and disadvantages of sole proprietorship but the advantages outweigh the disadvantages to a large degree. A sole proprietorship is relatively easier to form than other business entities. It does not require many licenses or even much maintenance. Apart from that, the owner can benefit from the profits and is solely responsible for the losses as well. This makes sole proprietorship easier to dissolve as well when the owner wishes.

Key Differences Between a Sole Proprietorship and Other Business Types


The most obvious of the differences between a sole proprietorship and other business models is the number of owners that they possess. Sole proprietorship, as the name implies, comprises a single owner. Other business models, however, may have a larger number of owners depending upon the business model. The number of owners of a business has changed the way it functions and operates.

The Role of Decision-Making in a Sole Proprietorship

In partnerships, decision-making can be a group effort. But in a sole proprietorship, the big decisions? They're up to the top dog - the owner. They can make calls without needing any approval from the team. This has its own upsides and downsides. On one hand, it can be liberating, making decisions entirely on your own. However, it can also be a blind spot, missing out on viewpoints a partner might have provided.

Distribution of the profits

The profits are distributed evenly among all the partners in partnerships. Whereas, in a sole proprietorship, all the profits go to the owner of the business. The same goes for the losses as well. In partnerships, all the owners share the burden of the losses but in a sole proprietorship, the owner bears the weight of the losses alone.

Advantages of a sole proprietorship

Ease in setting up of sole proprietorship

Starting a sole proprietorship? It's often easier than building other business types. To begin, the legal hoops are fewer, making it a lighter hit on the pocket. For those folks who are just starting their entrepreneurship journey with lesser resources, this model could be much more appealing and achievable. Plus, it's easier on the sweat - requiring less effort to get off the ground.

This advantage plays an important role for those who are planning to launch their own start-up business. With little to no legal fee, they can focus their finances on their new business.

Hire as many people as you want

In a sole proprietorship, the business owner has the authority to hire as many people as he wishes to do so to work under him or alongside him. There are no legal procedures involved with the other business models. However, this makes the risk factor high as well for the sole proprietorship owners. They are solely responsible for the payment of their employees, therefore, they must make sure that they hire as many people as they can handle. So, the wise choice would be to hire only those people who are talented and can help your business in ways that other ordinary people can’t.

Tax ease

Do you know the tax tale of a sole proprietorship? It's a simple one - they get taxed once. Contrast this with corporations, where both the company's income and the shareholders’ dividends are subject to taxation. Now, that's double trouble.

Disadvantages of a sole proprietorship

Challenges in Obtaining Financing and Credit in a Sole Proprietorship

Running a sole proprietorship isn't all rainbows and butterflies, especially when it comes to money matters. Banks are often more trusting of larger, established corporations than smaller, individual-run businesses when it comes to granting loans or credit. Plus, since the responsibility of financing falls entirely on the owner's shoulders, personally saved funds, initial investments, and credit history are all integral to the business's financial health.

Balancing between work and personal life

Owners of sole proprietorship businesses often find it difficult to distinguish their personal life from their work lives. Their balance between work and personal life is completely out. They have a hard time taking out of their business to go on vacation or just relax. The pressure of the work and the risk of their work suffering from their time away is too large to ignore. Even if they find the time to go away on a vacation, they have to stay up-to-date with whatever is happening at their company to make sure that their business does not suffer.

Business lasts as long as the owner is there

A sole proprietorship also has a tricky tether to its owner's lifespan. As long as the owner breathes, so does the business. But when they part from the world, the business doesn't just vanish. It gets wrapped up into the owner's personal estate and can take a heavy hit from inheritance taxes. Building a succession plan can serve as a safety net in such scenarios.

At the end of the day, a sole proprietorship brings both rewards and risks to the table, and they're not to be taken lightly. Choosing to go down this business route will depend largely on your personal circumstances, your capacity for risk-taking, and your long-term vision. In the grand chessboard of entrepreneurship, the choice is yours to make.

Waqar Hussain is the founder of The Business Goals. He writes about entrepreneurial strategies and is an SEO consultant by profession. He is a B.Com, GDM, and an MBA from the Australian Institute of Business.


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