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Sole Proprietorship Business : Meaning, Information, Advantages, Disadvantages

Sole Proprietorship Business : Meaning, Pros and Cons, Essay

Sole Proprietorship Business Meaning

A business that is carried on by only one person is called sole proprietorship business. He/she is only person who is the sole owner of the business and who usually runs and manages the business. There may be one or more people working under him/her who are referred to as the employees of the business. Sole proprietorship business refers to the form of business concern where the sole owner of the business is the sole risk bearer and the profit recipient as well. The word ‘sole’ means only and the word ‘proprietor’ means owner. Sole proprietor is referred to as sole trader as well.

In a sole proprietorship business, the owner and the business are referred to as separate entities in the books of accounts. But, the sole owner and the business are considered to be single entity under the Income Tax Act of India. The assets of the business belong to the proprietor who introduces them in the business. The sole proprietor introduces money and assets as capital. He/she is not paid salary but he/she can withdraw money from the business which is known as drawings.

Sole Proprietorship Business : Meaning, Information, Advantages, Disadvantages

Sole Proprietorship Business

Advantages of Sole Proprietorship Business

There are several privileges of a sole proprietorship business. The sole proprietor can be him/her own boss. Business decisions can be taken by him/her without any compulsion of asking any other person. He/she can withdraw the whole of the profits earned in an accounting period or can withdraw partial amount depending on his/her discretion. He/she is free to end the business as per his/her wish. It is the easiest form a business can be. No Income Tax return for the business is required to be filed, instead, the business profit/loss is taken into account in that of the proprietor. A sole-proprietorship business is hassle free to start. Although in some cases licenses are required but in majority of the cases less legal compliances are to be adhered to start such a business. A sole proprietorship business does not require to undergo any process of registration to commence business. A sole proprietorship business requires capital of a small amount to start the business unlike any other form of business. This form of business is not required to pay any tax on employment

Cons of Sole Proprietorship Business

A sole proprietorship business is not free from drawbacks. The liability of the owner is unlimited and his personal properties can be sold by the creditors of the business to recover their dues. He/she is personally accountable for all the aspects of the business owned by him/her If a law is suit filed against  the business then it is to be deemed to be have been filed against the owner. If the owner cannot pay the debts of the business, he or she may have to claim personal bankruptcy. A sole proprietorship business can be transferred to a legal heir or can be sold to a third party to keep it continued in changed management. But, if the owner of the business dies, the life of the business also gets ended as well. Expansion of business in an organic way is difficult job for a sole proprietorship business. It is not eligible to issue shares or bonds to the public at large to accumulate huge financial resources. It can either take loan from a financial institution or reinvest in the business the profit earned from operating the same.

Conclusion on Advantages and Disadvantages of Sole Proprietorship Business

Although a sole proprietorship form of a business is privileged in many respects, it is not free from limitations as well. It can be said that a small and medium scale of business can be managed by a single owner with effectiveness and efficiency. But, to set up a business on a large scale, sole proprietorship is not an appropriate choice at all.  Many startups in India prefer to set up their businesses as sole proprietorship form of businesses. Eventually many of them choose to change into partnership entities or corporate organizations to accommodate operations on large scale.

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About the author

Rajarshi Bose

I am scorpion by birth, very passionate about art, quite humorous by nature, accounting & finance student, financial trader by hobby and last but not the least, lover of sports.