The sole proprietorship is the oldest, simplest, and most common form of business entity. It is a business owned by a single individual. For tax and legal liability purpose, the owner and the business are one and the same. The proprietorship is not taxed as separate entity. Note that the earnings of the business are taxed at the individual level, whether or not they are actually in cash. There is no vehicle for sheltering income. For liability purposes, the individual and the business are also one and the same. Thus, legal claimants can pursue the personal property of the proprietor and not simply the assets used in the business.
Advantages of a Sole Proprietorship
Perhaps the greatest advantage of this form of business is its simplicity and low cost. You are not required to register with the government, nor are any legal charter required. The sole proprietorship form of business has other advantages:
- The owner or proprietor is in complete control of business decisions.
- The income generated through operations can be directed into the proprietor’s pocket or reinvested as he or she sees fit.
- Profits flow directly to the proprietor’s personal tax return; they are not subject to a second level of taxation. In others words, profits from the business will not be taxed at the business level.
- The business can be dissolved as easily and informally as it was begun.
These advantages account for the widespread adoption of the sole proprietorship in the India. Any person who wants to set up shop and begin dealing with customers can get right to it, in most cases without the intervention of government bureaucrats or lawyers.
Disadvantages of the Sole Proprietorship
This legal form of organization, however, has disadvantages:
- The amount of capital available to the business is limited to the owner’s personal funds and whatever funds can be borrowed. This disadvantages limits the potential size of the business, no matter how attractive or popular its product or service
- Sole proprietors have unlimited liability for all debts and legal judgements incurred in the course of business. Thus, a product liability lawsuit by a customer will not be made against the business but rather against the owner.
- The business may not be able to attract high-calibre employees whose goals include a share of business ownership. Sharing the benefits of ownership, other than simple profit-sharing, would require a change in the legal form of the business.
- Some employee benefits, such as owner’s life, disability, and medical insurance premiums, may not be deductible, or may be only partially
deductible from taxable income.
- The entity has a limited life; it exists only as long as the owner is alive. Upon the owner’s death, the assets of the business go to his or her estate.
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