What is Sole Proprietorship? Explained With Examples

Interpretation: An individual proprietorship is the uncomplicated business organization in which one individual possesses and administers the business and is accountable for all aspects of the business and receives all profits.

Establishing a small business can be a daring process. You have to devise a sound business strategy, attract customers, and manage short- and long-term finances.

If you are still searching for the most suitable business entity type then you might be motivated by learning about the advantages of the individual proprietorship. 

What is Individual Proprietorship?

The individual proprietorship is the straightforward form of business under which one can operate a business. The individual proprietorship is not a registered entity. It simply refers to an individual who owns the business and is liable for its debts.

An individual proprietorship can operate under the name of its owner or it can operate a business under a fictitious name, such as Nancy’s Nail Salon. The fictitious name is just a trading name which does not establish a legal entity separate from the individual proprietor owner. 

The individual proprietorship is a popular business structure due to its simplicity, ease of setup, and low cost. An individual proprietor only needs to register his or her name and obtain local licenses, and then the individual proprietor is ready for business. 

Individual proprietorship VS LLC

A major contrast between individual proprietorships and limited liability companies (LLC) is that the individual proprietor is completely in control and responsible. 

In partnerships, there is another person sharing the responsibilities of the business. Another significant difference between individual proprietorships and corporations or LLCs is that the financial liability rests with the LLC and not the individuals running the LLC. 

For instance, if the LLC is unable to pay its liabilities, the operators’ assets have protection against debt collection for the LLC’s outstanding debts.

Advantages of Individual Proprietorships

  1. Commencing an individual proprietorship is simple. Unlike other business forms, commencing an individual proprietorship requires less paperwork and time to establish a legal individual proprietorship. 
  2. It is cost-effective to start an individual proprietorship. Whereas other business forms have increased fees and filings to open for business, individual proprietorships tend to be economical models to begin and manage. 
  3. There are some tax benefits for an individual proprietorship. Instead of the business having to file its own tax return, individual proprietors report businesses’ profits and losses on their personal tax return. Additionally, the individual proprietorship is taxed using personal income tax rates instead of corporate making it simpler and more affordable to comply with your tax obligations. 
  4. Individual proprietors can recruit others and expand their business. Individual proprietorships can employ others and enjoy the tax advantages from doing so. Additionally, spouses of the owner can work for the individual proprietorship without being classified as an employee. 
  5. Owners have full and direct control over all decision making. Because the owner is the business, the owner makes all decisions for the business rather than sharing control with a partner or corporate board. This gives owners the freedom to run the business in the manner they desire. 

Disadvantages of Individual Proprietorships

  1. Owners are entirely responsible. If business debts become unmanageable, the individual owner’s finances will be impacted. When an individual proprietorship is unable to pay its debts, the owner’s home, savings, and other personal assets can be utilized to settle those debts. 
  2. Self-employment taxes apply to individual proprietorships. Owners must pay self-employment taxes on business income. 
  3. Business activity ceases with the death or departure of the owner. Because the owner and the individual proprietor alone own a business, if the owner dies or becomes incapacitated then the business dissolves with them and the capital and assets of the business become part of the personal estate. The assets and property are subject to inheritance taxes and can have a significant impact on employees of the individual proprietorship. 
  4. Collecting capital is a challenging task. Initial funds of the business are provided by the owner and raising funds for the business can be difficult since they cannot issue stocks or other investment income. Loans may also be challenging if the owner does not have sufficient assets to secure additional funding. 

Instances of Individual Proprietorship

Individual proprietors own businesses in many industries. Many home-based businesses are operated by individual proprietors. Below are some of the instances of the individual proprietorship. 

  1. Bookkeeping Business 

A bookkeeping business provides the financial needs of other businesses. A bookkeeper maintains a company’s income, expenses, and other financial information into an accounting system. This gives business owners detailed financial information regarding their business. The financial information managed by a bookkeeper is used to prepare a company’s tax returns. 

  1. Financial Planner

Individual proprietors work as financial planners, offering their services to individuals and small businesses. They assist families in planning for retirement, saving for college expenses, and investing in securities. Financial planners serving businesses may help a company set up its employee retirement packages and other employee benefits. 

  1. Computer Repair Services

Computer repair companies are often operated as individual proprietorships. Some business owners operate commercial shops, while others work from home. Small computer repair businesses typically cater to individuals. 

  1. Catering Company

Catering companies provide their services for parties, weddings, church functions, and business events. In most cases, an individual proprietor running a catering company needs to hire employees. 

  1. Freelance Writer

Some freelance writers work as independent entrepreneurs, while others start small publishing firms. A freelance writer provides content to business owners or writes content to sell to consumers. Press releases, sales copy, website content, and blog posts are commonly provided by freelance writers. 

This encompasses a comprehensive understanding of individual proprietorship and its advantages and disadvantages with some instances of individual proprietorship which will aid you in getting an idea of selecting the form of your business. If you encounter difficulty in comprehending anything do inform us we will be pleased to assist you.

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