Sole Proprietorship

Sole proprietorship:

• A sole proprietorship also known as a sole trader.
• It is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business.
• All profits and losses accrue to the owner (subject to taxation).
• The owner has unlimited liability, which means that all assets of the business are owned by the proprietor and all debts of the business are their debts and they must pay them from their personal resources.
• It is a “sole”  proprietorship in the sense that the owner has no partners.
  For example:
  Albert works as a carpenter. He opens a furniture company name “Albert’s Furniture”. Therefore, he is known as a sole trader because he owns the company alone.

Advantages:

• Easy to start up and also easy to discontinue. As it can be started fairly easily with minimal capital requirements.
• Are subject to fewer regulations relative to other types of businesses.
• The owner has full autonomy with regard to business decisions.
• One takes all the profits of the business. Therefore, this is the main reason that most businesses are of this type.
• A sole proprietorship is not a corporation, therefore, it does not pay corporate taxes, but the owner of the business pays self employment taxes on the profits made, making accounting much simpler.
• No double taxation like corporate entity.
• Has a quick decision process as a sole proprietor has total control of his business.
• A sole proprietor may do business with a trade name other than his or her legal name.
• This also allows the proprietor to open a business account with banking institutions.
• Absolute freedom in decision making.
• All profits will be the owner’s personal property.
• No reports of accounts are required.
• Only need to pay personal income tax and not business tax.

Disadvantages:

• Facing difficulty in raising capital since only a sole trader has to make up for all the business’s funds.
• Unlimited liability. As the owner of the business is responsible for the business’s debts because he has control over the business. This also means that the risks and failures in the business will involve the owner’s personal property.
• The owner will be responsible for the debts and risks of the business.
• Legally, there is no difference between the owner’s personal and business property.
• Operating as a sole trader, the owner’s will find it difficult to take days off for holidays and may have to work long hours.

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