Sole Proprietorship: Definition, Types & Benefits

You must have heard the word "entrepreneur". It is a highly familiar word nowadays. Especially after the Covid-19 pandemic, we have seen that there has been a rise in small businesses.

As the name suggests, a sole proprietorship is a business for which an individual is solely responsible. It is the simplest form of trading due to fewer complications and government regulations. 

A sole proprietorship, also known as a sole trader or sole entrepreneurship, is one where an individual is solely responsible for the business and its whereabouts; hence the legal complications are already cut short. 

For example, just think of the nail salon near you. 

One person is the owner of the business, who is also the person providing the services. You will also see that the sole traders operate their business on their own name as a sole proprietorship is not considered as a separate entity from the owner.

Several businesses start as sole proprietors and eventually become more complex business structures as they keep growing. As sole proprietorship is legally considered the same entity as the sole trader, the individual signs the contract in their own name. They will even have their checks issued on their names even if the business operates under a fictitious name.  

These sole proprietors can combine their assets and business assets. It is an advantage that enterprises and LLPs cannot. They solely take care of their loans and tax implications. Also, you do not have to attend a meeting or perform voting formalities.

There are multiple benefits of a sole proprietorship.

• Quick and easy process of set up as compared to other business structures
• Lesser government rules and formalities
• Full control over your business 
• Ease of combining personal and business assets 
• As there is only one owner, the information stays confidential 

Apart from these advantages discussed above, there are some drawbacks of being a sole proprietor:

• Debts, losses or any other types of liabilities are the sole responsibility of the business owner. 
• Owner cannot sell interests to raise capital as there is no share of the company.
• As owners have to manage all different aspects of a company, they have little to no time left for their personal lives. 
• It is one risky step to take up sole proprietorship as it can jeopardise one’s assets involved in loans and liabilities. 

In a sole proprietorship, the owner is liable for all risks associated with the business. For example, if an owner takes out a loan for the business purpose, the owner is wholly accountable for the same. Being unable to pay off the loan might cost him to lose his business as well as any other asset he owns, including his property. 

In the worst case scenario, which can be an untimely demise of the business owner, all of his assets, including cash, retirement savings and even property, can be held liable for cessation of the business. Hence, there are multiple risks involved in sole proprietorship, and you should be aware of them before investing.