Advantages and Disadvantages of sole proprietorship

While considering the legal structure of your new business, in India you are basically have five form of business ownership to choose, a company, a partnership firm, a LLP, a OPC or a sole proprietorship.

The only business that doesn’t need to be registered in India is sole proprietorships that owned and operated by one individual. In India, it’s one of the most popular and widespread forms of conducting business.

sole proprietorship

So for instance, if I am planning to start a business called ‘XYZ & CO’ as a proprietorship business then I am not required to go through business registration process unless i am liable to register under state sales tax or service tax or under any other law of the country.

Like any other form of business ownership, proprietorship business also has its own advantages and disadvantages.

If you plan on starting a sole proprietorship, you should be fully aware of the various pros and cons that are involved in such a business endeavor.

Let us look into the advantages and disadvantages of a sole proprietorship.

Advantages of Sole Proprietorship

  • Setting up a sole proprietorship is easy and inexpensive compare to a company and other form of business.
  • You are not required to file any annual return unless your proprietorship is registered under any law which require it to file periodical return. For instance, its mandatory for businesses to file periodical return irrespective of the form of business if its registered under the sales tax or service tax law.
  • Proprietor is actually liable to pay tax for the business as an individual. You are not required to file separate Income tax form for your business income. For this reason, individual can claim tax deduction under various sections like 80C, 80DDB, 80DD and 80E while calculating their tax liability for the business income.
  • As a sole proprietor you own 100% of the business, for which you are entitled to all the profit that the sole proprietorship business collects.
  • Control over all business decisions remains in the hands of the owner.
  • Proprietor can shut the business down at a moment’s notice.

Disadvantages of sole proprietorship

  • Sole proprietor is personally responsible for all the debts and liabilities of the business. This means if your business fails, personal assets like car, house and all other assets can be seized to discharge business liability. This is the biggest disadvantage of choosing to operate as a sole proprietorship.
  • Difficult to raise money in the long run. Investors won’t usually invest in sole proprietorships as it does not issue shares or other money-generating investments like a company do.
  • This type of business can also be risky because there is no separation between the owner and the business.
  • Upon the owner’s death, the sole proprietorship business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries.

Because of the advantages, a sole proprietorship is ideal for the small retail shop owners, self-employed contractors, home-based businesses and start-ups.

It’s not mandatory to keep the same form of business ownership for the life of a business. You can change the form of business to company, LLP or OPC at a later point of time. Many small businesses start out as sole proprietorships and then become company later on.

To determine whether a sole proprietorship is the right business structure for you or not, it would be a wise decision to consult with a chartered accountant or financial consultants who can explain the various laws to you.

Also Read: Cost of company registration in India

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.