Sole Proprietorship - Definition, Advantages, Disadvantages

Sole proprietorships are one of India's most common types of businesses. However, there are features of a sole proprietorship that a person should be aware of before entering into one. It also comes with its own share of advantages and disadvantages that need to be balanced to make the optimal decision.

Sole Proprietorship- Definition

Sole proprietorships, also known as sole traders, are businesses owned and run by a single person, called the sole proprietor. The sole proprietor is responsible for taking all decisions and enjoying the profits or bearing the losses of the business. They do not need to be incorporated under the Companies Act, 2013.

Sole Proprietorship Features:

• Unlimited Liability: Sole proprietors need to bear unlimited liabilities when it comes to their business.
• Personal Identity: A sole proprietorship does not enjoy a distinct legal identity as it is not a specific legal entity. The identity of the business is attached to the identity of the sole proprietor.
• Single Ownership: Sole traders are the only owners of sole proprietorships. They are responsible for pooling all the resources necessary for the business.
• No Specific Legislation: Unlike partnerships, or public companies, sole proprietorships do not have any dedicated specific legislation under which they function. The sole trader is only subject to common law provisions and shall be competent to contract and accordingly be subject to the contract act whenever he enters into them.

Advantages of Sole Proprietorship:

• Lack of Legal Formalities: Sole traders enjoy not having to undergo stringent legal compliance procedures, as they may choose to run the business in an unincorporated way. While the legal environment today imposes an under of checks and balances on bigger organizations, there are comparatively very few formalities that a proprietorship needs to fulfill.
• The concentration of Power: Sole proprietorship can prove to be a great option for persons who prefer to work without any interference and have complete control over business operations. This is because a sole trader holds all the power in making crucial and simpler decisions for the business.
• Easy Operations: There are extremely few formalities that a sole trader needs to comply with within their daily functioning. There do not exist any mandates such as periodic board meetings or procedures to get resolutions consented to by multiple parties. This makes a sole proprietorship considerably easy to operate.
• Speedy Decision-Making Process: Since a sole proprietor is in charge of all the decision-making processes in the business, they have the option of making decisions in a speedy and time-effective manner. They are not bound to have meetings and discussions with colleagues or partners before entering into new agreements or taking new steps for their business.

Disadvantages of Sole Proprietorship:

• Financial Constraints: In a sole proprietorship, the sole trader is responsible for investing the entirety of the capital required for the formation and operation of the business. This includes investing the capital required for fixed assets, such as land or machinery, and procuring capital for running the business on a daily basis, such as through purchases of stock. Therefore, the sole trader has to shoulder a huge financial burden, which can prove to be a challenge.
• Limited Foresight: Due to human limitations, a sole trade might be overwhelmed by business operations and miss out on potential opportunities to improve the business. Their expertise in certain areas may fall short when it comes to newer fields. For instance, certain sole traders may fail to keep up with the rapid technological advancements in society, causing a setback for their business.
• Larger Tax Liabilities: Sole proprietorships are not subject to enjoying the same tax benefits as partnerships or other forms of companies. They have to pay a larger portion of taxes on their taxable income. The sole trader has to undertake to file income tax and associated formalities, all on their own accord. This increases the responsibilities of the sole trader.