To initiate the discussion over the advantages and disadvantages of a sole proprietorship, we must understand what sole proprietorship is. Sole proprietorship refers to a business that is owned and run by a single individual. This individual is solely responsible for his/her business with no partnership. It can have different people who are part of the business but the owner-ship must belong to one.
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.
Differences between a sole proprietorship and other business models
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.
In charge of decision-making
It is a known fact that in partnership, all the partners involved have an equal say in the decisions of the company. However, when it comes to a sole proprietorship, the decisions are only made by the owner of the business. The owner can decide as he/she pleases without taking the consent of other members working alongside him in a sole proprietorship. This may count as both an advantage and disadvantage of the sole proprietorship. This is because on one side the owner is free to take any decision as he wishes to. But, on the other hand, he gets deprived of another viewpoint that he may have otherwise gotten if he were in a partnership with someone.
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
A sole proprietorship is easier to establish as compared to other business models. They are inexpensive as well as require little to no effort in setting up. They do not require any complex licensing or registration with the state offices. The only fees that you have to pay are for obtaining a license under your company’s name and other legal formalities.
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.
Sole proprietorship businesses are taxed only once. On the other hand, shareholders of corporations are taxed multiple times.
Disadvantages of a sole proprietorship
Difficulty in securing financing and business credit
The main disadvantage of a sole proprietorship is that it is relatively difficult to gain financing and business credit than it is for other business entities. This is mainly because the banks tend to have more faith in well-established companies that are much larger and have a history of credit. Besides this, since all the financing comes from the owner of the sole proprietorship himself, the whole business relies on the personal savings, initial investments, and credit history of the owner himself.
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
Another disadvantage of a sole proprietorship is that the business continuity is dependent upon the lifespan of the owner. As long as the owner is still alive, the business will continue to survive. And after the death of the owner, the business becomes a part of the personal estate of the owner. In addition to this, all the assets will then be subjected to inheritance taxes which can be a hefty sum in itself. The employees may suffer a lot because of this.
After weighing the advantages and disadvantages of a sole proprietorship, it is safe to say that the risk factors, as well as the benefits, are both high. Therefore, an entrepreneur must decide if a sole proprietorship is a way forward for him.