No business can be started without having a proper kind of entity. There are many kinds of business registration like private limited company registration, LLP, OPC, public limited company, sole proprietorship firm, partnership firm etc. It’s up to the business owner and the type of business one is running. The current blog will discuss the business type which is suitable for small businesses. We are talking about the sole proprietorship firm. Here we compare both the advantages and disadvantages of a proprietorship firm, so that it will be easy to understand why this kind of entity is suitable for small businesses. It has been said that for small businesses, a proprietorship firm is suitable because for this type of entity investment is very less. Also the formalities are not that harsh. They are easy to maintain, hence best for the less cost or small businesses.
What is a Sole Proprietorship Firm?
One kind of business registration that is appropriate for local firms is a proprietorship firm, or so we would say. There are both the advantages and disadvantages of a proprietorship. There are no plans for these firms to grow. They are merely restricted to a certain area. The local community also makes up their clientele. A Sole Proprietorship Firm requires just one person. In 2013, a well-known One Person Company emerged to replace this idea. A single personal company is another option if you’re a single person looking to grow your business in the future. Here are some examples of companies that can launch their enterprise by registering as sole proprietorships:
- Nearby kirana shops
- Nearby merchants and hawkers
- Regional food companies
- Suppliers of local area services
- There is no possibility for hotels and restaurants to grow outside of their immediate neighborhood.
What are the Key Advantages of the Sole Proprietorship Firm?
There are many advantages and disadvantages of a proprietorship firm, let’s discuss them one by one for the better understanding and the benefits of choosing a sole proprietorship firm for your business. Some of the key advantages of the proprietorship firms are:
Limited Paperwork
In the other kind of business entity there is a lot of paperwork, while registering them as a corporation. But when it comes to a sole proprietorship firm it has very little paperwork which makes the work of the business owner less hectic, because it’s not easy to manage the hectic paperwork. Due to less paperwork, sole proprietorship firms have easy management. Out of the various advantages and disadvantages of a proprietorship, this is one of the key advantages of such an entity.
Less Formalities Involved
As there is no formal procedure to register this type of entity, there are very few formalities involved in this. Less formalities makes this kind of business easily manageable. Because of this quality it is suitable for small businesses. The owners of the small businesses neither have a big budget nor have a big team for the management, hence the entity with less formalities best suits such businesses.
Easy Establishment and Operations
Sole proprietorship firms are the entities which can be easily established. They do not need to register themselves as the LLPs, Private Limited Companies, OPCs etc. also their business operation is very easy and can be managed with less formalities. Easy establishment and operation is another advantage out of the various advantages and disadvantages of a proprietorship, that makes it highly preferable among the small business owners.
Easier Tax and Straight Forward Banking
Sole proprietorship firms are having the most easier tax as well as straightforward banking system. There is no need for a banking and tax system like other entities. They are somewhat similar to the businesses which are run by the individuals. There is no need for separate bank accounts like Limited Liability Companies, Private Limited Companies, Public Limited Companies, One Person Companies, etc.
Less Compliances
If we see the compliances of any kind of entity like Limited Liability Companies, Private Limited Companies, Public Limited Companies, One Person Companies, etc, we come to know that they are very hectic and have handsome fines and penalties in case of non compliances. But when we saw the sole proprietorship firm, we came to know that they are not having any such hectic compliances. Hence they are good for small businesses.
Privacy and Flexibility
In the sole proprietorship firms everything has been owned by the proprietor of the business. He is having all the responsibilities of the business. As the proprietor is having the sole power, this firm is having privacy and flexibility both. Privacy is because of the sole responsibility of the proprietor and flexibility is because sole power is in the hand of the proprotor, hence he can decide things easily without the permission or consent of any third party.
What are the Disadvantages of the Sole Proprietorship Firm?
Some of the key disadvantages of the sole proprietorship firm are mentioned below for the purpose of the comparison between the advantages and disadvantages of a proprietorship firm:
No Liability Protection
As sole proprietorship is not having the advantages of the separate legal entity, there is no protection of the liability in this firm. Proprietor is liable for the activities of the firm solely, hence all the profits and losses are the responsibility of the proprietorship firm. That is why it has been said that there is no liability protection in such a business entity. Out of the various advantages and disadvantages of a proprietorship, it is one of the key disadvantages of such kinds of entities.
Hard to get Credit or Loans
As sole proprietorship firms are not registered entities and they are not having separate legal identity it’s hard to get credit for such kinds of businesses. That is one of the disadvantages out of the many. Because of this, most professionals do not suggest running a business in a sole proprietorship. They are lacking in many things which come with other types of business entities.
Hard to Sell the Business
Sole proprietorship firms have been attached with the proprietor of the business. All the things have been operated and managed by the proprietor only. Hence it has been said that such kinds of businesses have started with the proprietor and ended with him. In case of the death of a proprotor such kind of business ends up automatically. They are not having perpetual succession like other business entities given under Companies Act of 2013.
Lack of Reliability, Transparency and Credibility
If you see the entities like Limited Liability Companies, Private Limited Companies, Public Limited Companies, One Person Companies, etc you come to know that they are registered with the registrar of companies due to which their entire information is publicly available which makes them transparent, reliable and credible among the consumers. On the other hand in the sole proprietorship firms all the things are in the hands of the proprietor and nothing is public, which makes this firm less trustworthy.
Conclusion
There are many advantages and disadvantages of a proprietorship firm. A sole proprietorship firm offers advantages such as minimal paperwork, ease of establishment, and simpler tax procedures, making it suitable for small businesses with limited resources. The entity’s flexibility, privacy, and low compliance requirements make it appealing for local enterprises. However, it comes with disadvantages like the lack of liability protection, difficulty in obtaining credit, challenges in selling the business, and a perceived lack of reliability, transparency, and credibility compared to registered entities. Choosing a sole proprietorship depends on the business owner’s priorities and the nature of the business, with an awareness of both advantages and disadvantages of a proprietorship firm.
