sole proprietorship
Sole Proprietorship

Disadvantage of Sole Proprietorship


One of the easiest and simplest forms 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 head CA 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 the owner, he 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/she seems fit. As an 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 a partnership or company.

Some of the major disadvantages 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 the owner himself needs to inject funds through their own personal resources or by borrowing from friends, relatives, banks, or financial institutions 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 the owner himself is solely responsible for all the losses of a 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 the Companies Act, 2013 which is an extension of Sole Proprietorship integrating the advantages of both Sole Proprietorship and an incorporated business. It can be better understood by comparing OPC with that Sole Proprietorship

OPC vis-A -vis Sole Proprietorship

Separate Legal EntityOwner & entity is the same personality
Limited LiabilityUnlimited Liability
Debt is is not the sole responsibility of the ownerDebt aC sole responsibility of the owner
Finance aC credit record of the companyThe finance credit history of the company
Separate taxTax paid by the owner
Legal requirement aC will need to register itself as suchLegal requirement aC will need to draw up a paper declaring its status

Further, a reason why OPC should be preferred, instead of Sole Proprietorship is that in the 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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