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Advantages and Disadvantages of Proprietorship

Sole proprietorship is the most widespread form of business ownership in the world. As the name suggests, it is a kind of business in which a single person is vested with the ownership of the assets and affairs of the business. In this article, we look at the advantages and disadvantages of a proprietorship firm.

Know more about proprietorship registration.

Advantages of Proprietorship

The following are some of the major advantages of proprietorship firm.

Easy to Establish

A sole proprietorship business does not have any specific registration requirements and the proprietor’s legal identity is used by the business. Hence, a proprietorship can be started without any registration. Using the PAN and Aadhaar of the promoter,  Udyog Aadhaar registration and Trademark Registration can be obtained optionally to create and protect the identity of the business.

Easier to Operate

As a single person is at the helm of affairs, it is easier to operate as the particular person will be the sole decision maker and he need not consider a plethora of opinions. There is no concept of a board meeting or approval from other persons in a proprietorship firm.

Sole Beneficiary of Profits

No other business, other than that of a sole proprietorship and one person company, entitles the owner as the sole beneficiary of profits. In all other types of an entity like a partnership, LLP or company, a minimum of atleast two persons are involved.

Compliance & Taxation

Since a proprietorship firm is not registered with any Government authority like the Ministry of Corporate Affairs, the compliance requirements are minimal. 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. In case of proprietors who have attained the age of 60 years or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 3,00,000. In case of proprietors who have attained the age of 80 years 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:

• Contributions to provident fund, life insurance premium, subscription to certain equity shares or debentures etc.
• Contribution to certain pension funds.
• Contribution to notified pension scheme of the Central Government.
• Medical insurance premium.
• Caring for a dependent who is ailing with disability.
• Medical expenses.
• Repayment of loan availed for higher education.
• Payment of rent.
• Income from royalty.
• Royalty on patents.
• Handicapped persons.

Privacy

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.

Disadvantages of Proprietorship

The following disadvantages must be taken into perspective while deciding to start a sole proprietorship firm:

Unlimited Liability

This is one of the most disturbing aspects of a sole proprietorship firm. On the occurrence of a loss, the proprietor must meet the liabilities at any cost, which implies that if the need occurs, his/her personal assets may have to be used for discharging the liabilities.

Difficulty in Obtaining Funds

A sole proprietor cannot indulge in sale of business interest or shares, which deprives the entity from the receipt of any type of 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 death or insolvency of one of the promoters. Hence, it would be easier for a company or LLP to raise bank loan when compared to a proprietorship firm.

Higher Tax Incidence

Proprietorship firms are taxed similarly to an individual. Hence, income tax rate for a proprietorship firm is based on slabs. Though the income tax rate for income of upto 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, the income tax rate for a proprietorship firm is higher than the income tax rate of a company. Hence, in the long-run, it would be more prudent to register a company to reduce income tax liability.

Know more about process for registering a company.