sole proprietorship

Disadvantage of Sole Proprietorship

Sole Proprietorship

sole proprietorship

One of the easiest and simplest form to start a business in India is Sole proprietor. a CA or Sole Proprietor CA refers to only ONE owner. There may be employees or helpers hired under the owner, but there is only one  a CœheadaC who administers, owns and runs the Business.

A sole proprietorship is an unincorporated business owned managed and controlled by a single person with all authority, responsibility and risk as there is no separation between the owner and its Sole Proprietorship business.  As all the profits of Sole Proprietor belong to owner, he himself is personally responsible for all debts and liabilities incurred by the business.

A sole proprietor can own the business for any duration of time and sell it when he or she seems fit. As owner, a sole proprietor can even pass a business down to his or her heirs.

Running your business as a sole proprietor has many advantages, but there are some drawbacks as well particularly in the long term and thereby it is the smallest form of business as compared to partnership or company.

Some of the major disadvantage which can summed up are as follows

  • Unlimited liability of the sole proprietor as he is personally liable for all debts and actions of the company.
  • Lack of separation between business and personal funds which ultimately personal expenses, rather than reserving them for business growth.
  • No legal distinction between the business and owner in a sole proprietorship
  • Limited financial resources as owner himself needs to inject funds through their own personal resources or by borrowing from friends, relatives, banks or financial institution instead of taking from partners / other shareholders.
  • Sole proprietors pay taxes on business income as part of their personal tax returns rather than filing separate business and personal taxes.
  • Lack of expertise can slow and even limit growth.
  • No sharing of loss as owner himself is solely responsible for all the losses of sole proprietorship.

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ONE PERSON COMPANY

To remove the above disadvantage of Sole Proprietorship, a new concept of a CA  or ONE PERSON COMPANY (OPC) CA has been introduced under Companies Act, 2013 which is an extension of Sole Proprietorship integrating the advantages of both Sole Proprietorship and that of an incorporated business. It can be better understood by the comparing OPC with that of Sole Proprietorship

OPC vis-A -vis Sole Proprietorship

OPC SOLE PROPRIETORSHIP
Separate Legal Entity Owner & entity is same personality
Limited Liability Unlimited Liability
Debt aC not the sole responsibility of owner Debt aC sole responsibility of the owner
Finance aC credit record of the company Finance aCcredit history of the company
Separate tax Tax paid by the owner
Legal requirement aC will need to register itself as such Legal requirement aC will need to have to draw up paper declaring its status

 

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Further a reason why OPC should be preferred, instead of Sole Proprietorship is that in future Sole Proprietorship can be converted into a Private / Public Limited Company for expanding the current business. Also, the converted private company can again be converted into OPC if required.

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