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Sole proprietorship - Most common form of Business

RG - A Helping Hand 
on 14 September 2011

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As the title of this write up suggests A sole proprietorship is still the oldest and the most common type of business in India. You may find lots of proprietorship businesses near you place.

 

In general terms A “Sole Proprietorship” business means a business that is owned by only ONE person. You can operate a sole proprietorship under your own name, or under another name you've chosen. We may also call it a one man Army.

 

Agree that there may be few employees or assistants hired by the owner for the smooth functioning of business, but there are only one “Owner” who administers and runs the business.

 

DEFINITION OF A SOLE PROPRIETORSHIP [FROM INTERNET]

 

The definition of a Sole Proprietorship is: A business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk.

 

FEATURES

 

Ease of formation is its most important feature of this kind of business form. One of the main features of this kind of business is that since you are the only owner, you are free to run the business just the way you want to run it. Also, in a sole proprietorship you get to keep all the profits. Further it has no legal existence separate from its owner.

 

ADVANTAGES OF PROPRIETOR SHIP BUSINESS


There are lots of benefits of choosing this form of business. Some of the points have been listed below for your understanding. Kindly have a look:

 

1.    Ease of Formation

 

Ease of formation is its most important feature of this kind of business form because it is not required to go through detailed legal formalities. Very small amount of capital is required initially and there is no minimum capital requirement.

 

2.    No registration required

 

Registration of the proprietorship is also not essential. However, the owner may be required to obtain a license specific to the line of business from the local administration.

 

3.    Easy Winding up of business


Just like formation winding up of the business of proprietorship is also very easy. It is the owner’s decision to form or wind up the business at any time.


4.     Entire profit belongs to the proprietor


The profits earned by the business belong to the proprietor alone. Likewise he bears the risk of losses as well. So there is direct connection between the efforts of proprietor and consequent business profits.


5.     Quick decisions


Since in a sole proprietorship business the proprietor is the real owner and directly responsible for all the business decisions. However he may appoint few persons to assist him in carrying out regular activity of the business. Yet he is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of the decision.

 

6.     Good control over the business


In sole proprietorship business the proprietor has full control over each and every activity of the business. Since the proprietor has all authority with him, it is possible to exercise better control over business.

 

7.     Tax Benefits


Another big advantage of this form of business is the tax simplicity. As a sole proprietor, you declare your business income on your personal income tax form, rather than having to file a separate tax form like a corporate assesses.


8.     Other Benefits


i.   Due to single handed control the proprietor will be able to maintain business secrecy. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands.

ii.   In the case of sole proprietorship business, the proprietor is in a very good position to keep direct connectivity with his vendors, customers and employees.

 

 

DISADVANTAGES OF PROPRIETOR SHIP BUSINESS

 

Few disadvantages are also there of this kind of business form. Some of the points have been listed below. Please have a look:

 

1.      Unlimited liability

In a sole proprietorship business, you assume all responsibilities for the business. This means that as a sole proprietor, you are personally responsible for all the debts and liabilities of your business. So if your business fails, any of your assets, including your personal assets, can be seized and used to discharge the business liabilities.

 

2.      Limited capital

In a sole proprietorship business, the owner is liable to bring the entire capital. So sometimes it becomes difficult for him to arrange relatively a big amount of capital for expansion purpose.

3.      Lack of continuity

In a sole proprietorship business, the proprietor is the real and sole owner. This feature makes the business wholly dependent on the life of the proprietor. Illness, death etc. of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

4.      Expansion is difficult

Over a period of time it becomes difficult for a sole proprietor to expand the business activities. It is not possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

5.      Limited managerial ability

Initially a person with general understanding of business can start a sole proprietor ship business. But later on he may not be able to provide expertise to his business because there is lot of areas in business where expertise is required like administration, planning and marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management.

 

SUITABLE BUSINESS

 

Hence, this form of organisation is suitable for the businesses which involve low risk, small financial resources, capital requirement is small and risk involvement is not heavy like automobile repair shops, small bakery shops, tailoring, etc. It accounts for the largest number of business concerns in India. Some of them includes in no particular order:

 

Selling grocery items, books, stationery, vegetables, making special type of furniture, designing garments, grocery, garments business, telephone booth, making jewellery, haircutting or tailoring, cycle or motorcycle repair shop, etc.

 

IS IT NECESSARY TO REGISTER SOLE PROPRIETORSHIP FIRM

 

No.

 

No registration is required for a sole proprietorship. Simply open a bank account with the name & style you want to work. But if you are liable for state VAT or service tax registration, then you have to obtain VAT and/or service tax registration. In case you wish to have a trade mark, design and use it as your trade mark. One may even register a Trade Mark with the proper authorities.

 

Further, for sole proprietorship, no separate income tax PAN is required. The PAN of the proprietor will be the PAN of the firm and proprietor will have to file income tax return in his personal name.

 

The only thing you must take care of is that you have the required licenses specific to your line of business. For Example: If you are a doctor you need a license to practice etc. Find out about your line of business and what licenses you may require before setting up.

 

Hope this write up would be of some help. Due reference have been taken from net wherever required.

 

Thanks

RG




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