Sole Proprietorship vs. Self-Employed

September 26, 2023
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In the vibrant entrepreneurial landscape of India, choosing the right business structure can significantly impact your operations, growth prospects and taxation. The choice often comes down to understanding foundational structures like a sole proprietorship and the broader category of self-employed individuals. 

While both can often seem similar to aspiring entrepreneurs, they have distinct features and implications. Delving deeper into the difference between sole proprietorship and self-employed individuals can offer clarity to business enthusiasts, ensuring they select the structure that aligns most closely with their goals.

What is a Sole Proprietorship? 

A sole proprietorship is one of the simplest and most common business forms. It's characterised by a single individual owning and operating the entire business. This means there's no legal distinction between the owner and the business entity. 

One of the main advantages of a sole proprietorship is its simplicity and ease of setup as there are fewer regulatory compliances compared to other business forms.

Mrs Sharma started a small boutique in New Delhi selling handcrafted jewellery. She manages the shop, sources the materials, designs the pieces and handles the finances. All profits and liabilities of the boutique rest solely on her. This setup is a classic example of a sole proprietorship where Mrs Sharma is both the owner and the business.

Advantages of Sole Proprietorship

Many people begin their business by registering the startup as a sole proprietorship. But first, one must understand this structure's advantages. 

1. Simplicity and Ease of Formation: One of the most significant advantages of a sole proprietorship is that it's easy to start. There are minimal formalities and paperwork involved in its setup compared to other business structures. A sole proprietor must often secure a trade name and the necessary licences to begin operations.

2. Complete Control: The owner has total control over all decisions related to the business. Consulting with partners or a board of directors is unnecessary, from day-to-day operations to strategic decisions. This agility allows for quick decision-making and pivoting when necessary.

3. Tax Benefits: Profits from the business are considered the proprietor's personal income, allowing for certain tax benefits. For instance, in India, the proprietor can avail of deductions and exemptions under the Income Tax Act 1961. Moreover, the business itself isn't separately taxed, which can be beneficial from a tax perspective.

What is a Self-Employed Business Structure? 

Being self-employed refers to a scenario where an individual earns income directly from their own business, trade, or profession rather than receiving a salary or commission from another entity or employer. 

While a sole proprietor can be self-employed, not all self-employed individuals are necessarily sole proprietors. They could be freelancers, consultants or partners in a partnership firm. 

The number of self-employed individuals is on the rise. As of March 2023, 7% of people in the US between 18 and 29 stated they are self-employed/freelancers. 

Mr John is a freelance digital marketing consultant. He offers his expertise to various businesses on project-based contracts. He doesn't own a registered business entity but works and gets paid per-project basis. He is self-employed, managing his work, time, clients and finances independently without the confines of a structured business entity.

Advantages of Being a Self-Employed Individual

1. Flexibility: Self-employed individuals enjoy a high degree of flexibility. They can choose the projects they take on, set their working hours and decide on their working environment. This flexibility can often lead to a better work-life balance, depending on the nature of the work.

2. Direct Earnings and High Returns: Since self-employed individuals directly earn from clients without intermediaries, there's potential for greater profit margins. They have the liberty to set their fees or prices and can often earn more than salaried individuals in similar industries if they have a steady stream of clients or projects.

Upwork’s research finds that 60% of freelancers in the US who left traditional employment now earn more. 

3. Personal Branding and Niche Specialisation: Self-employed professionals, like consultants or freelancers, often develop strong personal brands. Their reputation becomes synonymous with the services they offer. This allows them to carve out niche specialisations, giving them a competitive edge in the marketplace and enabling them to command higher fees for their expertise.

Difference Between Sole Proprietorship vs. Self-Employed

Understanding the intricate differences between sole proprietorship and self-employed status is essential for aspiring business owners and professionals. This distinction becomes even more critical when one delves into associated concepts like independent contractors

Let's explore these differences under various factors and features of each. 

Legal and Financial Liability

One of the critical distinctions in the difference between sole proprietor and self-employed is liability. In a sole proprietorship, the owner has unlimited liability. This means the owner's personal assets could be at risk if the business incurs debt or faces legal issues.

This differs in distinction between independent contractor vs self-employed. 

A self-employed individual's financial and legal liabilities depend on their operating structure—whether they work for multiple clients, are part-time workers with a company, or operate their own business. 

Taxation and Financial Implications

Profits earned are taxed as personal income for a sole proprietor. They can avail of certain deductions and benefits specific to sole proprietorship structures in their respective jurisdictions.

In self-employment, taxes are levied on the income the individual generates from their profession or business. They can claim business expenses and other deductions, but the specifics can vary.

Status of Work and Contracts

An independent contractor is a self-employed individual who offers services on a contract basis to businesses or individuals. 

While all independent contractors are self-employed, not all self-employed individuals work as independent contractors. The former often work on specific projects or fixed-term contracts without the long-term commitments typical of employment.

Operational Framework

While the terms may seem interchangeable, they highlight a nuanced difference. A sole proprietorship refers to the business structure itself, while "individual" denotes the person's status. An individual might operate a sole proprietorship but could also function as an independent contractor, freelancer, or under other self-employed modalities.

In conclusion, while there is a thin line of difference between sole proprietors and self-employed, understanding them can guide professionals in their journey, ensuring they make informed decisions that align with their goals and operational preferences.

How Can EORs Help in These Business Structures? 

An employee of record (EOR) is an organisation that serves as the official employer for tax, insurance and compliance purposes. At the same time, the worker (whether sole proprietor or self-employed) continues to perform their job as dictated by the engaging company. 

Although an EOR may not play a role in the initial setup of a sole proprietorship or self-employment, its expertise becomes invaluable during the expansion phase, particularly when the business considers hiring or entering new markets. 

Reach out to Rapid, a trusted EOR in India with over 20 years of mastery in the local arena. In the era of booming startups, strategising to remain competitive is paramount. Let us manage the complexities of regulatory compliance, including taxation and legalities, allowing you to concentrate on business growth.

Discover more about what we offer; schedule a demo today.

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