One of the crucial decisions to be undertaken by an entrepreneur is to choose the right form of business structure. This is because the business structure determines power, control, risk and responsibility of the entrepreneur. Further, such a decision also determines the distribution of profits and losses. Also, the form of business structure influences the growth and success of the entity.
Additionally, it is quite challenging to transform into another business structure once an entrepreneur decides the type of business entity. This is because there is too much legal compliance as well as procedures that need to be followed to wind up a business. Furthermore, it will result in loss of business opportunity, capital and employment. Therefore, an entrepreneur needs to put in a lot of thought before choosing between different types of business structures.
These structures include:
- Sole Proprietorship
- Hindu Undivided Family
- Limited Liability Partnership
- Branch Office
- Cooperative Societies and
This article talks about the simplest and most popular form of business entity, that is, a sole proprietorship. So let’s consider the following case study before we discuss sole proprietorship registration and other aspects related to it.
Sole Proprietorship Example
Akash is a CA in Turbo Solutions, an accounting firm in Mumbai. He thinks of starting his own business after working for around six years and gaining the requisite skill set. So he needs to choose a suitable business entity that meets all his requirements before setting up the business. Hence, here are some of the questions that he tries to answer to choose between various types of business entities:
- What is the scale of operations of your business?
- What are the capital requirements of your business?
- What is the degree of managerial ability required?
- Who controls and manages the business?
The business owner himself.
- What is the level of risk involved?
Degree of risk is small.
- Do you wish to share profits?
- Can you cope with multiple compliances?
Thus, Akash sets up an accounting consultancy of his own by the name of Singhania and Associates. Therefore, he chooses to go for a sole proprietorship form of business entity after considering the above factors.
What is a Sole Proprietorship?
The term Sole Proprietor comprises of the words Sole meaning ‘single’ and proprietor meaning ‘owner. Thus, a sole proprietorship is a form of business structure owned, managed and controlled by a single individual. Such an individual receives all the profits and bears all the risks and losses attached to the business. Further, he has all the authority to take all the decisions with regards to the business. Thus, a sole trader or proprietor is a person responsible for providing the capital, bearing the risk and management of business.
Further, such form of business entity deals with small scale business activities like bakers, accounting firms, beauty salons, consulting agencies etc.
Characteristics of Sole Proprietorship
1. Easy Formation and Closure
Under Sole Proprietorship, there is no separate procedure for the registration of business. A person intending to start a sole proprietorship simply needs to register in his business name under any one of the government enactments. This would depend on the nature of business he wishes to undertake. Similarly, the closure of sole proprietorship business takes place if the business owner decides to close the business himself or dies.
2. Unlimited Liability
The liability of a sole proprietor is unlimited. This means that the owner is personally responsible for the payment of debts in case the assets of the business are not sufficient to meet such debts. Furthermore, personal properties of the owner shall be used to pay off the outstanding debts.
3. Single Ownership
A single individual owns a sole proprietorship form of business. This means such an individual owns all the properties and assets of the business. As a result, he is the sole bearer of all the risk of the business.
4. No Sharing of Profits or Losses
The entire profit generated in a sole proprietor business belongs to the sole proprietor himself. Similarly, if such a business suffers any loss, it is also to be borne by the sole proprietor alone.
5. One Man’s Capital
The sole proprietor is the one who brings all the capital required to run such form of business. Further, there are various sources of funding through which a sole proprietor can bring money on board. These include his personal resources or borrowings from family and friends, banks and other financial institutions.
6. Single Person’s Control
The right to run the business and make all the decisions resides with the sole proprietor alone. He can consult other people to make certain important decisions. However, he’s free to carry out his plans without any interference.
7. Less Legal Formalities
There are almost no legal formalities to form or operate a sole proprietorship type of business. No separate registration is needed for such a business entity. However, a sole proprietor may obtain a license under any of the government enactments as per the nature of his business. Also, a sole proprietorship entity needs to have seal in the name of its business.
Advantages of Sole Proprietorship Form of Business
- Sole Proprietor form of business is easy to form and wind up.
- All the business decisions are taken by a single person.
- The profits of the business belong solely to the business owner.
- Such type of business entity is also entitled for certain concessions from the government. This is because sole proprietor form of business has small scale of operations.
- The sole proprietor is able to keep the important business information confidential and hence maintain secrecy.
- Cost of managing such a business organization is inexpensive. This is because the proprietor personally supervises the business activities.
Disadvantages of Sole Proprietorship Form of Business
- The amount of capital raised by the sole proprietor is limited as he’s solely responsible for arranging the funds.
- Liability of the sole proprietor is unlimited and his personal assets can be used to pay off outstanding debts.
- There is a lack of managerial expertise on the part of a sole proprietor as he may not be an expert in all aspects of management.
- The sole proprietorship business is linked with the life of a proprietor. The business might close if the owner suffers illness, death or insolvency.
- There is a limit to which a sole proprietor can expand it activities. This is because the sole proprietor as a single person cannot manage business operations beyond a limit
Registration Procedure of Sole Proprietorship Business
Sole proprietorship business is controlled and managed by a single individual. Further, no agreement is required to form such a business entity. However, a sole proprietor needs to get registered in its business name under any of the prescribed acts suitable to his business. A registration under any of the government acts is considered equivalent to the registration of a sole proprietorship business.
The acts under which a sole proprietor can register include:
- Shops and Commercial Establishment Act, 1958
- Registration under MSME act, 2006 (Udyog Aadhaar Registration)
- GST Registration
Here is an infographic explaining Sole Proprietorship and Sole Proprietorship Registration Procedure in a simple to understand way.