A business that is run or operated by a single owner or individual, and this owner enjoys all profits earned, similarly liable for unlimited liabilities, loss and debts all alone, is a sole proprietorship business. The Entrepreneurs, business owners who are self-employed, independent contractors and Franchisee, all people are sole proprietors. The owner of a sole proprietorship is known as the Sole proprietor.
There are many other types of business. If this ownership is divided between two or more persons, and agree to share the profits, risk and losses, then business practice is no longer sole proprietorship, then it is called partnership. So it is well clear that business type depends on the ownership, and this ownership defines what kind of business it is.
If the business company has a separate identity, liability is limited and owned by two or more people, the business is neither sole proprietorship nor partnership, it is then it is corporate business. These are some of a few other types of business entities which are limited partnership, LLC (Limited liability Company), non-profit organization and cooperative.
A sole proprietorship is a type of business entity. There are many other types of business. These businesses are sole proprietorship, partnership, and corporation. These are some of a few other types of business entities which are limited partnership, LLC (Limited liability Company), non-profit organization and cooperative.
The sole proprietorship is business entities which is the easiest entity of the business. Set a sole proprietorship business are easy to set up as this type of business is settled up by a single person and operated by this same person (Kinnison, 2019).
The above picture elaborates that sole proprietorship is owned by one person. The owner is liable for all business debts and lawsuits. As the sole proprietorship is not the same entity, the debts of the business are actually, the debt of the owner, but meanwhile, all profits of the business directly flow to the owner of a sole proprietorship. It is a simple business because, in this business type, governmental involvements and regulations are lacking.
These businesses are most popular among sole owners, individual contractors and consultants due to less governmental intervention. The owner of a sole proprietorship has to pay the personal income tax on the earning or profit made from the business. This is also known as a sole trader or merely proprietorship. In a sole proprietorship, separate business names are not necessary, so the owners run business under their own name. Another positive of a sole proprietorship is that business can be easily ended up as easily it can be settled up (TWIN, 2021).
- 1 Definition of Sole Proprietorship
- 1.1 The legal definition of a sole proprietorship is defined as (ACRA, 2019):
- 1.2 Features and Characteristics of Sole Proprietorship
- 1.3 Advantages and Disadvantages of Sole Proprietorship
- 1.4 Advantages of the Sole Proprietorship
- 2 Disadvantages of the sole proprietorship
Definition of Sole Proprietorship
The easy definition of the sole proprietorship business is defined as the business entity which is owned by and operated or controlled by a single person, and business is not a separate entity from the person. The person does not have another partner, and the person is personally liable for all the debts incurred in a business. This simple definition mentions the difference between sole proprietorship from other businesses (TWIN, 2021). For example, if a person is doing freelancing, starting a new venture or entrepreneur, and even has solo gigs, then he is considered involved in a sole proprietor business.
The legal definition of a sole proprietorship is defined as (ACRA, 2019):
A sole proprietorship business is not a separate entity from the owner
The sole proprietorship business in Trade is not different from the owner. The business and owner are the same. All the profits earned from a sole proprietor are included in the personal income tax.
The owner of the business has no limited liability.
The sole proprietorship has unlimited liability means that if a business face losses and is unable to meet the number of losses from the business assets, then the creditors can overcome their losses and damages by coming for the personal properties. The owner of a sole proprietorship is not exempt from the liabilities incurred by the business. They do not have government protection as these businesses are not registered. The personal money and the business money are the same, one time. So the business liabilities come from business to owners’ extend.
The business can make lawsuits or can be sued in the owner’s name.
When to sue the business or person, one has to file against the name of the person who is operating and controlling the business. The lawsuit is made against the owner name, instead of a company because the company is not registered (The people’s lawyer, 2019).
Features and Characteristics of Sole Proprietorship
Following are the features and characteristics of the sole proprietorship (tutor, 2021).
- Ownership: The sole proprietor is a business in which all the business is owned by a single person. This owner, known as a sole trader, is responsible for creating a pool of capital and managing all activities of his business on his own.
- Common identity: The owner and the business are not separate entities. This is why no special filings and legislation is required to start a business. This makes an easy start-up. Besides this, all legal lawsuits are done in the name of the owner.
- The pool of capital: The owner comes up with his all capital and resources on his own. If he lacks some capital, he can borrow from his friends and family members as an investment to start a business.
- Unlimited liability: The liability incurred by the business is not limited. The creditors can come for personal assets or even for the property if their losses are not recovered.
- One man control: All the control is under one-man either its control over the business operation and management or on the profits, the owner is responsible for everything. Easy to Manage and Communication process is fastest.
- No special legislation: There is no legal protection by a government is given to the sole proprietorship as it is not necessarily registered.
Advantages and Disadvantages of Sole Proprietorship
The sole proprietorship has advantages, and meanwhile some disadvantages which are as below (CFI, 2021) :
Advantages of the Sole Proprietorship
- Easy to set up: The sole proprietorship is easy to start. It requires less paperwork and minimum, or no fees at all.
- No profit-sharing with partners: The person don’t have to share the profit with other partners and all the profit flows belong to the owner.
- Tax advantages: The owner does not have to pay dual taxes as happen in partnership and corporation.
- Very few governmental regulations: This business has very few legal requirements to follow. They do not have to spend time and resources such as on financial information reports.
Disadvantages of the sole proprietorship
- Unlimited liability: The unlimited liability goes from owner to entity
- No governmental legal protection: This business has no protection by the government, as the liabilities of business is not exempt as exempted in other business (partnership and corporation etc.)
- Difficulty in raising capitols: The fundraising is limited, they lack the opportunity of sell shares for fundraising.
Where register a sole proprietorship
Business can be conducted in many ways, such as in form of a sole proprietorship, partnership, and corporation, but no matter which business has to be conducted, the business must have to be registered. As partnerships and corporations are registered in SEC (Securities and Exchange Commission), similarly the sole proprietorship is registered in the Department of Trade and Industry (DTI) (law, 2021).
Registering the sole proprietorship is very easy and simple. For registration, DTI requires some information such as proposed name/s of business, business activity, address of the business, business scope, and owner related personal information. The DTI also asks for any sort of identification card, such as passport, CNIC, PRICE ID, Driving card etc. DTI provides three ways for registering sole proprietorship which involves: on the counter, online filling and hybrid. Once the registration is valid only for 5years and must be renewed on time, otherwise extra 50% of the registration fee shall be imposed.