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Home Business A Basic Guide on Sole Proprietorship

A Basic Guide on Sole Proprietorship

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By definition, sole proprietorship identifies a single people, who is handling all the business operations. This is a commonly found type of business ownership. And, the sole proprietor is a natural man. He/she is not a legal entity or person. Also, the sole proprietor owns everything about the business. This is one of the reasons why sole proprietorship is famous around the world. Any profit made by the business will be owned by a single person. Also, these are entrepreneurs who don’t share any legal entities. In fact, to launch a sole proprietorship business, you don’t have to register or even be incorporated. Thus, this is one of the simplest forms of business you can think off. Anyone interested in launching a medium scale, or small scale business would find the concept of sole proprietorship useful.

Related Post: Difference between Proprietorship and Partnership Firm for Startups

Important features of sole proprietorship

features of sole proprietorship

Just like every other type of business, sole proprietorship comes with many impressive features. Here are a few important features to focus on:

  • This ownership model doesn’t have any type of legal formalities. There are no laws or regulations to govern this kind of ownership. This means business owners are not obligated to follow specific rules that are created by regional authorities. Additionally, the business doesn’t involve any kind of registration of incorporation. However, it is important for the business to carry a license. The license identifies the owner, as someone who is authorized to engage in business activities.
  • Sole proprietorship suffers serious liability issues. The business and the owner are never separated. This increases the liability of the owner. In case the business suffers a loss or debts – the owner will be impacted severely. In fact, there are times with the owner has to sell his/her personal assets to meet the debts.

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  • When the business experiences success, the owner is likely to see all the profits. Why? Because he/she is the only owner of the business. The sole owner doesn’t have to share his/her profits with any of the shareholders. Mainly because the business does not have any. The risk he takes is compromised by full profits.
  • The business and its owner can be treated as a single entity. Both have a common identity. The sole proprietorship completely depends on the business owner and his ideas. This means imprisonment, death, retirement, and insanity will affect the functionality of the business. When the business owner’s life comes to an end, the business will also end.

Types of sole proprietorship

There are three common types of sole proprietorship. The concept discussed so far focuses on self-employed business owners. These are professionals who engage in business or trade with the intention of making money. The venture can be a full-time or part-time source of income. This type of sole proprietorship doesn’t have any contracts, with any stakeholder or client.

Another common type of sole proprietorship would be independent contractors. These are also self-employed business owners. Yet, they function more like an employee. The independent contractor gets hired by bigger brands. They are assigned specific tasks. However, taxes are not withheld from their pay. Also, the independent contractor will not be subject to benefits like insurance coverage. Meanwhile, the perks of being an independent contractor are inspiring. You will have the freedom to take up, or even decline assignments.  This is an option traditional employees don’t have.

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Franchise

Types of sole proprietorship

The last type of sole proprietorship would be the franchise. Most of the time, the franchisee will pay a franchisor for the use of brand items, ingredients, recipes, and more. The franchisee is often bound by the terms and conditions of the parent company. In this business model, royalties have to be paid. But, if you are someone with zero business experience, this type of sole proprietorship will be useful.

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