Sole proprietorship being the oldest and simplest form of business structure, has many features of it own. People usually choose this business structure as it requires the least amount of capital and because of several other features. They work well for small to medium-sized businesses.
It is a kind of business entity owned and run by one individual, with no distinction between owner and the business. The owner receives all the profits and bears all the losses.
In this blog, you will read about the several features of sole proprietorship. Let’s check it out!
1# Easy to Form
Sole traders, looking to start their own firm, do not have to file any special forms with the state, local or federal agencies in order to set up a sole proprietorship business. While registration of a new business, the owner must specify that he wants to run the business solely.
With no special fees, some states do require the owner to register a Doing-a-Business (DBA) document with the office of secretary of state. For instance, if you are a resident of California and want to set up your business there, and if you wish to run your business with some other name than yours, then you must file the DBA certificate with the county’s clerk office, which allows you to have a business name, printed on checks and other legal documents.
2# Unlimited Liability
Being a sole proprietor, the ownership and responsibility of any kinds of debts associated with the business will be held accountable on the owner. In addition to this, the business liability on any employee of the business, will also be a debt considered on the owner.
Creditors, in this case, are allowed to seize the personal assets such as home, property, cars etc. to cash the defaulted loan. Therefore, if you are thinking about setting up a high to medium-sized business, you may want to opt for a corporation or partnership structure where there is limited liability.
With the sole proprietorship structure, business owners must ensure keeping their personal assets separate from the business while registration, in order to save it from being seized in the event of a business failure.
3# Full Control
Sole proprietors have full discretionary control over every operation of the business. They are also decision-makers in this structure. They can hire employees, decide their minimum wage and also fire them whenever they feel like.
From controlling the financial decisions to controlling the staff and day-to-day functioning of the business operations, a sole proprietor has full control over the business and also receives the whole profit incurred by the business. He also makes a decision on saving or reinvestment of the profits and can choose to close, sell or transfer his/her ownership at any point in future.
4# Relaxed Taxation
With a relaxed taxation procedure for sole proprietorship owners, they only need to file a one or two-page form with the Internal Revenue Service called Schedule C along with their personal income tax return documentation.
With this schedule, they need to simply list their business revenues and expenses, with deductible options of automobile, office and other miscellaneous expenses from the income tax return under the supervision of a certified tax professional.
5# No Special Legislation
As you know a partnership firm falls under the Partnership Act, a joint stock company is governed by the Companies Act and a co-operative is governed by the Co-operative Societies Act, whereas a sole proprietorship is not governed by any special legislation.
A person who is competent to start a business, can register his business as a sole trader. However, he will be liable under the common law, the law of contract and the law of insolvency.
In a sole proprietorship, an individual person has the flexibility in managing the operations as he/she is mostly owner and the manager himself and have to take relevant and crucial decisions of the business and related to the daily operations.
With great authority and power in the business structure, a sole proprietor can run his business according to his wishes and mind, whatever works for him and opting for simple and flexible operations in his work. So, flexibility in daily operations is another feature of this business.
7# Funding Options
As capital will always be the backbone of any business since it helps in deciding the size, structure, and the volume capacity of the business. In a sole proprietorship business, the business owner can raise funds for setting up or for operations through different methods, which are:
- Personal savings
- Borrowing loans from family and friends
- Borrowing loans from financial institutions
8# Easy to Dissolve
As a sole proprietorship business requires very few legal documents and simple registration process and legalities to set up and for the functioning of the business, the owner can easily dissolve the business without much hassle.
With easy documentation process and no distribution of profits and losses among others, it is easy for a sole proprietor to dissolve the business at any time in the future, if incurring losses or in complete debts.
9# Building Relationships
A sole proprietorship business requires good relationships with other traders, customers or individuals in order to create a rapport and for building credibility of the business. Having amazing relations helps in creating a chain of coordination among the sole trader and their target customers.
With good relationships, the reach of the sole proprietorship business increases day by day and becomes a source of happiness and credibility for the business owner to expand more.
With easy formation and dissolution process, full control and a variety of funding options, starting a sole proprietorship might be a good option for new business owners. It also has few drawbacks such as unlimited liability, full accountability in case of debts and burden of all operations, sole proprietorship can be a difficult option for some people.
Hope this article helped you understand the features in detail before you make a choice of the business structure you wish to set up!