Sole Proprietorship
A business that legally has no separate existence from its owner. Income and losses are taxed on the individual's personal income tax return.
It is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name, such as Nancy's Nail Salon. The fictitious name is simply a trade name, it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.
Because a sole proprietorship is indistinguishable from its owner, sole proprietorship taxation is quite simple. The income earned by a sole proprietorship is income earned by its owner. A sole proprietor reports the sole proprietorship income and/or losses and expenses by filling out and filing a Schedule C, along with the standard Form 1040. Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the "bottom-line amount" from Schedule C is transferred to your personal tax return. This aspect is attractive because business losses you suffer may offset income earned from other sources.
As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe. You need not pay unemployment tax on yourself, although you must pay unemployment tax on any employees of the business. Of course, you won't enjoy unemployment benefits should the business suffer.
Sole proprietors are personally liable for all debts of a sole proprietorship business. Let's examine this more closely because the potential liability can be alarming. For example, a sole proprietor borrows money to operate but the business loses its major customer, goes out of business, and is unable to repay the loan. The sole proprietor is liable for the amount of the loan, which can potentially consume all her personal assets.
Features of Sole Proprietorship
Management
The owner of the enterprise is generally the manager of the business. He has got absolute right to plan for the business and execute them without any interference from anywhere. He is the sole decision maker.
Legal Status
The proprietor and the business enterprise are one and the same in the eyes of law. There is no difference between the business assets and the private assets of the sole proprietor. The business ceases to exist in the absence of the owner.
Ownership
The business enterprise is owned by one single individual, that is the individual has got legal title to the assets and properties of the business. The entire profit arising out of business goes to the sole proprietor. Similarly, he also bears the entire risk or loss of the firm.
Legal Formalities
In the setting up, functioning and dissolution of a sole proprietorship business no legal formalities are necessary. However, a few legal restrictions may be there in setting up a particular type of business. For example, to open a restaurant, the sole proprietor needs a license from the local municipality ; to open a chemist shop, the individual must have a license from the government.
Advantages of Sole Proprietorships
Beginning a sole proprietorship is easy. Unlike other business structures, starting a sole proprietorship requires less paperwork and time to create a legal sole proprietorship.
It is cheap to start a sole proprietorship.
Where other business structures have increased fees and filings to open for business, sole proprietorships tend to be affordable models to start and maintain.
Social Benefits
A sole proprietor is the master of his own business. He has absolute freedom in taking decisions, using his skill and capability. This gives him high self-esteem and dignity in the society and gradually he acquires several social virtues like self- reliance, self-determination, independent thought and action, initiative, hard work etc,. Thus, he sets an example for others to follow.
There are some tax benefits for a sole proprietorship.
Instead of the business having to file its own tax return, sole proprietors claim businesses gains and losses on their own individual tax return. Also, the sole proprietorship is taxed using individual income tax rates rather than corporate making it simpler and cheaper to comply with tax obligations. Sole proprietors can employ others and grow their business. Sole proprietorships can hire others and enjoy the tax benefits from doing so.
Equitable Distribution of Wealth
A sole proprietorship business is generally a small scale business. Hence there is opportunity for many individuals to own and manage small business units. This enables widespread dispersion of economic wealth and diffuses concentration of business in the hands of a few.
Disadvantages of Sole Proprietorships
Owners are fully liable.
If business debts become overwhelming, the individual owner’s finances will be impacted. When a sole proprietorship fails to pay its debts, the owner’s home, savings, and other individual assets can be taken to satisfy those debts.
Uncertainty of duration
The existence of a sole trader ship business is linked with the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is, therefore, uncertain.
Self-employment taxes apply to sole proprietorships.
Owners must pay self-employment taxes on the business income. Business continuity ends with the death or departure of the owner. Because the owner and the sole proprietorship are one, if the owner dies or becomes incapacitated then the business dies with them and the money and assets of the business become part of the individual’s estate. The assets and money are subjected to inheritance taxes and can have a great impact on employees of the sole proprietorship.
Raising capital is difficult.
Initial funds of the business are generated by the owner and raising funds for the business can be hard since they cannot issue stocks or other investment income. Loans may also be difficult if the owner does not have enough credit to secure additional money.
Suitability of Sole Proprietorship
Sole proprietorship business is suitable where the market is limited, localised and where customers give importance to personal attention. This form of organisation is suitable where the nature of business is simple and requires quick decision. For business where capital required is small and risk involvement is not heavy, this type of firm is suitable. It is also considered suitable for the production of goods which involve manual skill e.g. handicrafts, filigree works, jewellery, tailoring, haircutting,etc.
