One of the significant advantages of a proprietorship is that the owner is entitled to all profits generated by the business. Unlike other business structures where profits are distributed among partners or shareholders, the Proprietor retains full ownership.
The compliance requirements are minimal since a proprietorship firm is not registered with any Government authority like the Ministry of Corporate Affairs. Further, the Proprietor would only have to file income tax returns if the firm has taxable income of more than Rs.2.5 lakhs per annum. For proprietors who have attained the age of 60 or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 3,00,000. For proprietors who have attained age 80 or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 5,00,000.
Finally, the sole Proprietor can also reduce the income tax liability by availing the following deductions:
Since sole proprietorships are an unregistered form of entity, there is no database maintained by the Government with a list of all proprietorships. Hence, proprietorship firms are more private when compared to a company or LLP whose details are published on the MCA website.
Proprietorships offer a high degree of flexibility in terms of operations and management. The owner has the freedom to change the business structure, strategies, and policies as per their preferences without consulting or gaining consensus from others.
The following disadvantages must be taken into perspective while deciding to start a sole proprietorship firm:
A Sole Proprietorship is owned and managed by the Proprietor. The Proprietor alone is responsible for the sole proprietorship’s management and all business transactions of the proprietorship firm. Transferring ownership or passing down of business as a going concern to his/her legal heirs is also a cumbersome process in a Proprietorship, as many of the licenses or registrations in the name of the Proprietor cannot be transferred.
In a sole proprietorship firm, there is no distinction between the capital of the proprietorship firm and the Proprietor’s funds. Therefore, the Proprietor and proprietorship funds are the same. Sole proprietorships also cannot raise equity capital or have partners. Also, banks and financial institutions lend to proprietorship only after thorough due diligence as there is no distinction between the business assets and the Proprietor’s assets. Therefore, the fundraising ability of a business run as a proprietorship firm could be much improved.
A sole proprietorship firm is not considered to be a separate legal entity. The sole proprietorship’s and Proprietor’s assets and liabilities are the same. Therefore, the Proprietor is held personally liable for the liabilities of the sole proprietorship firm. This exposes the Proprietor to unlimited liability from the business. In contrast, in an LLP, a Private Limited Company, or a Person Company, the detriment of the Proprietor is limited to the capital.
A proprietorship business doesn’t have continuity as it legally ends with the death or incapacitation of the Proprietor. Therefore, a sole proprietorship firm’s business continuity or duration is limited, unlike an LLP, Private Limited Company, or Person Company.
A sole proprietor cannot sell business interest or shares, depriving the entity of receiving any equity funding.
Further, banks are also wary of lending large sums of money to a proprietorship firm as the existence of the proprietorship firm is tied to the Proprietor. On the other hand, in a company or LLP, more than one person would be responsible for the liability, and business continuity would be assured in the event of the death or insolvency of one of the promoters. Hence, it would be easier for a company or LLP to raise a bank loan when compared to a proprietorship firm.
Proprietorship firms are taxed similarly to an individual. Hence, the income tax rate for a proprietorship firm is based on slabs. Though the income tax rate for income of up to Rs.10 lakhs is lower when compared to a company, proprietorship firms cannot enjoy various benefits enjoyed by an LLP or Company. Further, for taxable income of more than Rs.10 lakhs, a proprietorship firm’s income tax rate is higher than a company’s income tax rate. Hence, it would be more prudent to register a company to reduce income tax liability in the long run.
While a proprietorship offers advantages such as ease of formation, control, flexibility, and direct profits, it also comes with disadvantages, including unlimited liability, limited resources, limited skills and expertise, and potential business continuity challenges. Aspiring entrepreneurs should carefully consider these factors when deciding on the most suitable business structure for their venture.
Created & Posted by Kartar