Launching a new business involves making several key decisions that will lay the foundation for a robust, profitable, and sustainable business. For instance, an important decision that new founders need to make is whether run it as a bootstrapped business or get investors into the mix. No doubt, all choices have their advantages and disadvantages. In this blog, we delve into the advantages of sole proprietorships, one of India’s oldest and most accessible business entities.
What is Sole Proprietorship?
A sole proprietorship is a business started by an individual without co-founders or investors. As the name suggests, the individual who launches a sole proprietorship business has sole ownership and control of the business. It is one of the most accessible and popular ways to launch a business, with limited costs, legal hassles, and ownership concerns among first-time entrepreneurs. From a legal standpoint, a sole proprietorship business and its owner are considered the same. On the other hand, a corporation or a Limited Liability Company (LLC) functions as a separate legal entity.
Advantages of Sole Proprietorships
A sole proprietorship is one of the most common business entities in the world. Here are its advantages:
1. It is easy to set up
A sole proprietorship has no official registration process to establish the business and start operations. You may need a domain-specific business license, depending on the nature of the business. Trademark and GST registrations are optional. Starting costs are relatively low compared to setting up a corporation or LLC, which requires legal interventions.
2. You are the sole owner
You completely own the business. There are no co-founders or shareholders, and all liabilities and assets are in your name. If you decide to sell the business, acquire another business, or invest in new assets, you are free to do so without other stakeholders' permission.
3. You make the decisions
Many professionals are motivated to move into entrepreneurship because they want to be their own bosses. As a sole proprietor, you can make key decisions and run the business as you see fit. You can shape the work culture, promote employees, and introduce new policies without delay. On the other hand, a business with a corporation or LLC structure will need to get approvals via board meetings or conversations with co-owners.
4. You keep the profits
In a co-owned business, one must share profits with investors and partners. However, the owner can enjoy all the profits in a sole proprietorship. You decide how to use or invest them. Even channelling them back into the business is completely your call.
5. Taxation is simple
The owner must file taxes as an individual, provided the profits are more than INR 2.5 lakhs per annum. In the case of senior citizens, this amount increases to INR 3 lakhs. They can avail of tax deductions under Section 80C of the Income Tax Act, National Pension Fund under Sec 80 CCD (1), and expenses such as medical insurance premiums and rent.
6. The benefit of privacy
Since a sole proprietorship is not required to be registered, the details of this entity are not publicly accessible via any database. Hence, a sole proprietorship's profits, losses, assets, liabilities, debt, and operating income remain completely confidential from public viewership.
7. No specific government regulations
Another advantage of sole proprietorships is that there are no specific government regulations to be followed, except the owner needs to file tax as per their income slab. On the other hand, corporations and LLCs need to comply with the relevant government regulations. For instance, they must follow specific administrative guidelines such as financial disclosure.
As is the case with any business entity, sole proprietorships come with their own set of disadvantages.
A major challenge for sole proprietors is that if the business incurs a debt, there is no distinction between the owners' private and business assets. If your business cannot settle a bank loan, then the bank can come after your private assets to recover their losses.
Another challenge is when the sole proprietor wants to raise funds and grow the businesses. Investors typically prefer to invest in businesses with at least two owners. They also like to invest in businesses registered as corporate entities or LLCs with several concessions.
As the business becomes more profitable, one must pay more taxes. Hence, it is advisable to shift to a business entity with tax concessions, to raise profitability.
Despite the advantages of sole proprietorships, owners must review whether it would be the right fit for their specific business from a taxation, profitability, funding, and scalability perspective. Make an informed decision based on the relevance of the sole proprietorship structure to your business model, unique business needs, and expected growth trajectory.