Forms of Business Organizations : Sole Proprietorship
Sole Proprietorship is a form of business organization where a business is formed with the knowledge and the capital of one person. In other words sole proprietorship requires the investor to accept the whole risk of the entity where he is unlimitedly liable for the debts incurred by the entity. When it comes to a sole proprietorship, owner and the entity are considered as one person where there is no legal existence for the entity. This is the most common way of forming where one person starts up the business with a small amount of capital whenever he wants.
Sole Proprietorship has many advantages such as:
- No minimum capital or maximum capital barriers in starting up the business.
- No registration procedure is involved.
- Management is easy as only one person is involved in decision making.
- Profits are solely owned by the owner.
- Owner can easily expand the business if capital is available.
- Owner’s personal effort and capabilities drive the business success.
- Frauds are minimum.
- Support of the family member’s of the owner can be obtained to achieve business success.
- No corporate tax is applied.
Sole Proprietorship has many disadvantages such as:
- Unlimited liability incurred by the owner.
- Losses are only borne by the owner.
- No perpetual succession (If the owner is dead or leaves the entity business will be shut down)
- Single person’s opinions in decision making may lead to less productive decisions.
- Low availability of capital to expand the business.
- No legal existence of the entity as a separate legal entity from the owner.
- Owner is liable to pay income tax on income earned.
Even though there are many disadvantages in entering into a sole proprietorship it is the most common form of business organizations as it gives many advantages to the owner in autonomy and owning profits.