A Proprietorship Firm or Sole Proprietorship is the simplest form of business that can be. It is one-man business ownership, where the owner is the business and is not a separate legal entity. Being a separate legal entity comes with government regulations which Sole proprietorship is exempt from. These do not even need to be registered. Most small businesses start as sole proprietorships and go on to expand later.
Since the owner and the business are the same entity, in this case, the profits and losses incurred by the business are directly incurred by the owner. This has both positive and negative aspects of the business and its owner. To learn more about Proprietorship Firms, after B.Com course in Ahmedabad is a good choice.
What Makes A Sole Proprietorship?
- No Separate Identities: Since the business and the owner are the same, the owner becomes responsible for all transactions and activities carried out by the business.
- The Risk Factor: The profits and losses of the business are directly associated with the owner. This means all losses are incurred from the personal wealth of the owner while all profits go to their personal wealth as well.
- Legal Formalities: Since no law governs sole proprietorship, there are no procedures to follow when establishing, expanding or closing a Proprietorship Firm.
- Liability: Since the business equates to the owner, there is an unlimited financial liability for the owner. The debts and liabilities of the business automatically fall on the owner.
- Owner and Business Life-cycle: The events and occurrences in the life of the owner will directly impact the running of the business. An accident, death, imprisonment, etc. will all affect the business operations directly.
Proprietorship Firm Is Not A One Person Company
- Legality Of The Business: Unlike a proprietorship firm which is not a legal entity, a One Person Company is a legal entity that is separate from the owner. It is defined and regulated under the Companies Act 2013. Enrolling in the after Commerce course in Ahmedabad will prove helpful in learning more about what makes Sole Proprietorship a unique and also largely preferred business choice for a lot of people.
- Liabilities: The liabilities of the business do not directly fall on the owner in the case of a One Person company. The owner has a limited liability towards the only shareholder of his company (Which practically is himself, but not so legally).
- Succession: Succession in a Proprietorship Firm depends on declaring a legal nominee. The continuity of the business stays uncompromised only if the nominee is declared in a will. The death of the (only) company member will otherwise simply disrupt the business.
- Tax Returns: If the annual turnover crosses the legally specified limit, sole proprietorships need to get their accounts audited. A-One Person Company on the other hand has to file annual returns just like a private limited company.
- Change In Nature: An increase in turnover of a One Person Company can lead to it becoming a Private or Public Limited Company. For a Sole Proprietorship, regardless of the profits earned, its status remains as a Sole Proprietorship.
Advantages Of A Sole Proprietorship
- Complete Control: Since the owner is directly liable for everything, at all steps and stages of the business, the owner has the complete power to decide on matters.
- Confidentiality: Financial data and documents are not required to be published by Sole Proprietorships which maintains the confidentiality of procedures and operations.
- Sense Of Achievement: Since the owner is answerable to own self only, all good decisions, advances, and business expansions bring great satisfaction to the self of the owner.
The Advantages Are Only One Side Of The Coin: Disadvantages Of Sole Proprietorship
- Unlimited Liability: The aspect of complete control means all losses are solely incurred by the owner. The liabilities continue from the business to the owner. A failing business can take with it the personal wealth of the owner.
- Uncertain Lifecycle: The life cycle of a Proprietorship Firm depends directly on the outlook and life events of the owner. A debilitated attitude or the happening of an event with a negative impact can leave the business in the lurch.
- Limits to Managerial Abilities: Since the owner is the business, and no other people are a part of it, tasks like managerial work become difficult to pull off for a single person.
- Limited Capital: Since there is only so much that an individual can invest from their personal wealth into a business, these businesses also need money to expand. Unfortunately, banks are not actively willing to lend to proprietorships.
The commerce course in Ahmedabad is a great learning opportunity for those planning to venture into the business world. A Sole Proprietorship is often the beginning of what ends up becoming big and beloved brands, products and service providers. Starting on one’s own is always a better idea, a better learning experience.
Part – iv- Learn Commerce structures IV: Public Limited Company
Part – iii – Learn Commerce Structures III: Private Limited Company
Part – i – Learn Commerce Structures: All About Partnership Firms