08 Characteristics of a sole proprietorship business

Sole Proprietorship

Many types of business ownership styles can be seen in the current business world. sole proprietorship is the most basic and the most common type of business that can be seen. These are the businesses with single-person ownership and the business type that can be considered as the oldest type of business and the simplest business structure to operate. Even though these businesses can be seen as a simple concept, few characteristics highlight the sole proprietorship businesses from the rest of the business types such as partnerships, private limited companies, and public quoted companies.

01. Single Ownership

Sole Proprietorships are single owner businesses. There is no any complicated organization. The business will be run solely by the owner and the investment is done by a single person. Due to this reason, the investments are low and the growth capacity is limited in sole proprietorships compare to partnerships and public limited companies.

02 Starting the business

This business style has the simplest method of business start. Since there are no legal requirements, the owner or the investor can simply start the business and continue operating. There is no government-regulated requirement in starting the business.

03. Simple Structure

The organization structure is simple in these businesses. Since there are no other involvements there is no ownership or profit-sharing structure. The owner invests and manages all the business activities.

04. Governing Documents

There are no governing documents for the sole proprietorship businesses. The owner can run their business according to personal preferences.

05. Liability

The owner has unlimited liability for the business. If the business gets bankrupted, the owner should bear the losses and pay the creditors from his own money. This unlimited liability adds risk to the sole proprietorship businesses compares to limited companies.

06. Legal formalities

There are no legal formalities required for the sole proprietorship businesses. It is not considered as a separate person in the presence of law. The owner of the business will be representing the business and liable for the business activities.

07. Tax treatment

Since there are no legal formalities, there is no separate tax treatment for the sole proprietor businesses. But the owner’s income tax will be included the income received from the business and will be taxed based on that.

08. Transferring Ownership

This is a difficult part of the sole proprietorship business. The owner has to completely sell the business to another person to transfer ownership. Once sold the previous owner will be completely out of the business and the new owner can change the business according to their preference.

Sole proprietorship businesses can be started by anyone who is willing to start a business and who can invest a sufficient amount of capital to the business solely. Since the capital will be invested by a single person, the sole proprietor businesses are usually smaller scale compared to other business styles.  Since the owner has full control over the business activities, they can freely manage and make changes in the business. This can be considered as both advantageous as well as disadvantageous due to the high risk involved.

The owner has the total right to close down the business whenever he wants. There are no legal requirements to fulfill before closing down. But he has to pay the creditors of the business before closing down the business. This is unlimited liability for the owner and can be disadvantageous in an event where the business is running on a loss.

Sole proprietorship businesses can be seen usually as the village grocery stores and businesses that do not require special technical abilities, does not involve high risk or capital requirement. This is just the common scenario as several sole proprietorship businesses run in mega-scale and involve in high-risk business activities.

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