Sole Proprietorship. What is Sole Proprietorship? What is a Sole Proprietor? The short answer is that a Sole proprietorship is a business form which is owned by a single person – a sole proprietor.
This is the Type Of Ownership Suitable For New Businesses
When an entrepreneur embarks on starting up a new business, he or she has to keep a number of factors in mind. The type of business he wants to start, financial capability, and the structure under which the company will be registered. While it is most appropriate for a person to set his business as a sole proprietor if he wants to be the sole owner, many small businesses instead prefer to register for a limited company as well. It all depends on the amount of financial or legal responsibility the owner is ready to take if the business falls into liquidation or incurs a continuous loss. Here are a few factors which will help you in deciding which business structure to opt for when setting up a new business:
Sole Proprietorship
A sole proprietorship is a business form in which there is only one person who is responsible for running the business. A sole proprietor has no outside intrusion and can take decisions on his own; in essence, he has total control of his company and the way it runs. Many people in the UK aim at starting their business as a sole proprietorship due to its many advantages.
Total control: In a sole proprietorship, you are the only owner and thus can run your business in any way you want without outside interference.
Sole decision-maker: Sole proprietors can run their business with much more ease as they can take decisions on their own and much more quickly.
Profits: In a sole proprietorship, the sole trader will have access to all the profits alone and does not have to share it with anyone.
Disadvantages
However, the main disadvantages of sole proprietorships are:
Limited Finance: a sole proprietor has to invest their own finance and may find it difficult to expand his business.
Unlimited Liability: The liabilities of the business which may result from losses will also be of sole trader’s. He has to pay for the losses from his own pocket and as a result, can become bankrupt.
It is due to this reason that people sometimes find it convenient to register their business as a limited company. A limited company is one where there is usually more than one shareholder who has invested in the company. The company has to be incorporated and registered under a company register. There are certain legal formalities that have to be satisfied before setting up a business due to which it is a bit more complicated than a sole proprietorship, however many people prefer to set up a company due to its various advantages.
The company is a separate legal entity: This means that the assets and liabilities of a firm are their own as it has its own identity distinct from the people who have invested in the business.
Owners have Limited Liability: The investors (shareholders) are not at risk if a business falls into a loss or gets liquidated. Everything will be paid from the company’s bank account.
Credibility: many clients feel comfortable dealing with a company as they think that because it is registered it is more trustworthy as compared to a sole proprietorship.
Disadvantages
Shared powers: As compared to sole proprietorship the shareholders have to share the power and have to discuss issues; thus there might be disputes.
Management of accounts: As compared to a sole proprietorship, a company has more complex legal requirements which are related to the management of its accounts and bookkeeping like maintaining journals and balance sheets.
The business structure most common in the UK and USA
Recent research highlights that in the UK, a majority of businesses were sole proprietorships; which constituted more than 60% whereas only 28.5% were registered as companies. Likewise in the USA, 19.4 million enterprises are sole proprietorships, whereas 1.4 million are companies. In Sweden the ratio is similar to the UK, over 60% of the newly created businesses are sole proprietorships. In Sweden, this form of business type is called Enskild Firma. It is always important to consider the advantages and disadvantages of the various business structures before setting up a new business. Where sole proprietorship may suit some, many will think of a “real” company as the safest option due to the advantage of having limited liability.
