Advantages And Disadvantages Of Sole Proprietorship

August 21, 2023
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Sole proprietorship remains a preferred business structure for entrepreneurs worldwide. Coca-Cola, Walt Disney, Amazon, McDonald’s and A&W Restaurant chains began as sole proprietorships, which later changed their business models. 

During the years of the pandemic, there was a significant rise in the number of self-employed individuals. As per the Bureau of Labour Statistics, as of January 2023, 10.1% of the workforce in the US is currently self-employed - approximately 16.2 million people. The country has seen a trend of rise in sole proprietorship since the 1980s, to be precise. 

Source

But while self-employment may feel liberating and flexible, about 20% of businesses fail within the first year. So before venturing into business as a sole proprietor, one must know all the aspects, advantages and disadvantages of this business structure. 

What Is Sole Proprietorship? 

A sole proprietorship is the simplest and most common business structure, where a single individual owns and operates the business. 

This type of business structure has no legal distinction between the owner and the business entity. This means the owner is responsible for all the business debts, liabilities and profits.

For example, an IT engineer with expertise in cybersecurity starts a consultancy named ‘CyberGuard Solutions.’ He markets his services online and in the local business community. 

Since no corporation or partnership exists and the owner runs the consultancy himself, ‘CyberGuard Solutions’ is a sole proprietorship. He earns profits directly from his services but is also personally liable for any business-related debts or issues. 

If a client were to claim damages due to an alleged oversight by him, he would bear the personal financial risk associated with that claim.

The Advantages of Sole Proprietorship

1. Simplified Startup and Management

Formation of a sole proprietorship is relatively easier and quicker than other business structures. There is no need for extensive paperwork or regulatory compliance in most jurisdictions. As an individual owner, you have direct control over all business decisions.

2. Taxation Benefits

A sole proprietor enjoys all earnings directly without sharing with partners or shareholders. It also makes tax compliance hassle-free as business income is reported on the owner's personal tax return in many countries, including the United States. 

In 2020, of the 28.3 million sole proprietorships, over 11.1 million (nearly 40%) claimed a home office deduction. 

3. Flexibility and Autonomy

This structure provides an ability to adapt quickly without needing approval from partners or a board. The complete autonomy in decision-making allows the proprietor to pivot business strategies as required.

4. Privacy and Confidentiality

All business operations and finances remain private without the obligatory public disclosures common in corporations. This ability to maintain a low profile can be advantageous in competitive markets.

5. Lower Operational Costs

The absence of a corporate structure reduces overhead costs. Other than the primary work supplies, there is only a need for elaborate office spaces or a large staff if the business demands it. You can work from your home, cafe or a co-working space as per your needs. 

On the other hand, the cost of incorporating a new business can range from $600 to $1400, depending on your chosen state. 

6. Personal Touch and Direct Relationships

A sole proprietor can maintain direct interactions with clients or customers, enabling stronger relationship-building. It gives a greater ability to customise services or products based on individual client needs.

The Disadvantages of Sole Proprietorship

1. Unlimited Personal Liability

One of the major disadvantages of a proprietorship is financial risk. The owner is personally responsible for all debts and liabilities of the business. This means personal assets like homes, cars and savings can be seized to settle business debts. The proprietor's assets are at stake in lawsuits or claims against the business.

2. Limited Capital and Resources

Sole proprietors often face challenges raising capital since they cannot issue stock like corporations. Their borrowing capacity might be limited to their personal creditworthiness. CB Insights report finds that 38% of startups fail because they run out of cash and cannot raise capital. 

3. Potential Growth Limitations

Since sole proprietorships operate on a smaller scale, they might need help to compete with larger corporations regarding resources, workforce and market reach. Due to limited benefits and growth opportunities, they might need help attracting high-skilled talent.

4. Limited Expertise

Sole proprietors rely on their knowledge and skills and, without partners, might lack diverse expertise in certain business areas. Without the checks and balances of partners or a board, decision-making can sometimes lead to oversights.

5. Continuity Concerns

The lifespan of a sole proprietorship is dependent on its owner. If the proprietor decides to retire or passes away, the business might cease to exist or face transitional challenges. Succession planning can be more complicated compared to other business structures.

Get Rapid’s Help in Scaling Up Your Sole Proprietorship

An employer of record (EOR) typically functions as an entity that hires employees on behalf of another company to ensure compliance with local labour laws and employment regulations. While EORs are most commonly associated with businesses looking to employ staff in foreign jurisdictions, their services can still benefit a sole proprietor in scaling a business's growth. By leveraging an EOR's established infrastructure, sole proprietors can save on operational costs associated with hiring, HR and administrative functions.

While an EOR might not directly help in ‘establishing’ a sole proprietorship, it can significantly assist in its scaling, especially when the business is looking to hire employees or expand into new markets.

If you want to expand your small business in India, you can contact Rapid, a reliable EOR with two decades of experience in the local market. Indian labour laws can prove challenging, and with the rise of startup culture in the country, you will need to devise strong strategies to sustain in the competition. So while you can focus on this growth, an EOR can handle the regulatory compliance with regard to the taxation and legal requirements. 

To know more about Rapid’s services, book a demo today.  

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