Sole Proprietorship Business: Merits, Demerits and more

by Anujeet Shivam
1 comment

Do you know which one is the oldest form of business organization?

Well, it is a Sole Proprietorship!

It’s not only the oldest form of the business organization while it’s also the most common business entity found in India.

Almost all the business we see around us, local grocery store, the chemist, the doctor are all probably registered as Sole Proprietorship.

It is also the most common type of business entity found in India. All the businesses you see around you, your local grocer, the chemist, the doctor are all probably sole proprietors. Let us look at some features of a sole proprietorship.

But, why the Sole Proprietorship business is so popular?

Let’s have a look at some interesting feature of it which might be one of the reason because of that it’s so popular :

Sole Proprietorship business is the simplest form of business in India. It’s doesn’t have a separate legal entity. It simply refers to the person who owns the business and the owner is individually responsible for the debts.

A Sole Proprietorship Business runs under the name of its proprietor/owner or we start a business with a fictitious name like “Sai Car Zone“.

The fictitious name of a Sole Proprietorship doesn’t create a separate legal entity from the owner, It’s just the Trade Name of your business.

Why prefer a Sole Proprietorship?

Sole Proprietorship businesses are best for those business owners who are interested in starting up small.

There are many Merits and Demerits of a Sole Proprietorship but the main merit of a Sole Proprietorship business is one can easily start his/her business and also the cancellation procedure is so simple.

The biggest Demerit of this enterprise is that there is no separation between the assets of the business and those of the owner. Therefore the sole proprietor’s personal assets can be used to satisfy business debts and liabilities.

Merits of Sole Proprietorship

  • Ease of creation. Owners can establish a sole proprietorship instantly, easily and inexpensively.
  • No state paperwork. There is no state filing required to create a sole proprietorship.
  • No separate tax filing. There is no separate business income tax filing. Business income or loss is reported on the sole proprietor’s personal tax return, and any tax is paid at the individual level.
  • Few ongoing formalities. Sole proprietorships face few, if any, ongoing requirements or formalities, For example, State annual report.
  • Easy formation and closure
  • Direct motivation
  • Maintenance of business secrets
  • Quick decision and prompt action
  • Better control
  • Flexibility in operation
  • Least record keeping
  • Close personal relation

A sole proprietorship is among the oldest and simplest business forms wherein, only one man heads the entire show. Some common examples of sole proprietorships are grocery shop, chemist shops, beauty parlors, fabrication units and so on.

Demerits of Sole Proprietorship

  • Limited resources
  • Limited managerial ability
  • Lack of continuity
  • Limited size
  • Unlimited liability

In contempt of various shortcomings, many business persons choose a sole proprietorship business, especially startup founders, due to its inherent benefits. Such business is appropriate where the market for the product is limited or when the customers demand personalized services. It also suits to the businesses where manual skills are required or where the capital required to start the business is relatively small and does not involve a high degree of risk.

FAQ

Q; The functioning of Sole Proprietorships in India are governed by the Proprietorship Act. True or False?

Ans: The statement is False. In fact, there is no such law in existence. Sole Proprietorship is not governed by any one single law. This is because it has no separate legal identity. There is no need for incorporation and the not many procedures to be done. Opening a bank account and obtaining a license (if necessary) are mostly the only steps involved.

Q; Is there any alternative of Sole Proprietorship Business in India?

Ans: Yes, It’s not as similar to Sole Proprietorship but it can also be started by a single person. It’s non-other than One Person Company. It’s a new form of business organization introduced in the Companies Act. 2013

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