Advantages and Disadvantages of Proprietorship
Advantages and Disadvantages of Proprietorship
Proprietorship is one of the simplest and most common forms of business ownership. It refers to a business structure where a single individual owns and operates the business. In a proprietorship, the owner assumes all responsibilities and liabilities associated with the company. While there are several advantages to choosing a proprietorship, some disadvantages must be considered. This article will explore both the advantages and disadvantages of a proprietorship, providing a comprehensive overview of this business structure.
Advantages of Proprietorship
The following are some of the significant advantages of proprietorship firms.
Easy to Establish
A sole proprietorship business has no specific registration requirements and uses the Proprietor’s legal identity. 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 business’s identity.
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 many opinions. There is no concept of a board meeting or approval from other persons in a proprietorship firm.
Sole Beneficiary of Profits
One of the significant advantages of a proprietorship is that the owner is entitled to all profits generated by the business. Unlike other business structures where profits are distributed among partners or shareholders, the Proprietor retains full ownership.
Compliance & Taxation
The compliance requirements are minimal since a proprietorship firm is not registered with any Government authority like the Ministry of Corporate Affairs. 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. For proprietors who have attained the age of 60 or more during the previous year, income tax filing would be required only if the taxable income is more than Rs 3,00,000. For proprietors who have attained age 80 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.
- Assistance to certain pension funds.
- Contribution to notified pension scheme of the Central Government.
- Medical insurance premium.
- Caring for a dependent who is ailing with a 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.
Flexibility
Proprietorships offer a high degree of flexibility in terms of operations and management. The owner has the freedom to change the business structure, strategies, and policies as per their preferences without consulting or gaining consensus from others.
Disadvantages of Proprietorship
The following disadvantages must be taken into perspective while deciding to start a sole proprietorship firm:
Proprietorship Management
A Sole Proprietorship is owned and managed by the Proprietor. The Proprietor alone is responsible for the sole proprietorship’s management and all business transactions of the proprietorship firm. Transferring ownership or passing down of business as a going concern to his/her legal heirs is also a cumbersome process in a Proprietorship, as many of the licenses or registrations in the name of the Proprietor cannot be transferred.
Proprietorship Capital
In a sole proprietorship firm, there is no distinction between the capital of the proprietorship firm and the Proprietor’s funds. Therefore, the Proprietor and proprietorship funds are the same. Sole proprietorships also cannot raise equity capital or have partners. Also, banks and financial institutions lend to proprietorship only after thorough due diligence as there is no distinction between the business assets and the Proprietor’s assets. Therefore, the fundraising ability of a business run as a proprietorship firm could be much improved.
Proprietorship Liability
A sole proprietorship firm is not considered to be a separate legal entity. The sole proprietorship’s and Proprietor’s assets and liabilities are the same. Therefore, the Proprietor is held personally liable for the liabilities of the sole proprietorship firm. This exposes the Proprietor to unlimited liability from the business. In contrast, in an LLP, a Private Limited Company, or a Person Company, the detriment of the Proprietor is limited to the capital.
Business Continuity
A proprietorship business doesn’t have continuity as it legally ends with the death or incapacitation of the Proprietor. Therefore, a sole proprietorship firm’s business continuity or duration is limited, unlike an LLP, Private Limited Company, or Person Company.
Difficulty in Obtaining Funds
A sole proprietor cannot sell business interest or shares, depriving the entity of receiving any 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 the death or insolvency of one of the promoters. Hence, it would be easier for a company or LLP to raise a bank loan when compared to a proprietorship firm.
Higher Tax Incidence
Proprietorship firms are taxed similarly to an individual. Hence, the income tax rate for a proprietorship firm is based on slabs. Though the income tax rate for income of up to 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, a proprietorship firm’s income tax rate is higher than a company’s income tax rate. Hence, it would be more prudent to register a company to reduce income tax liability in the long run.
Conclusion
While a proprietorship offers advantages such as ease of formation, control, flexibility, and direct profits, it also comes with disadvantages, including unlimited liability, limited resources, limited skills and expertise, and potential business continuity challenges. Aspiring entrepreneurs should carefully consider these factors when deciding on the most suitable business structure for their venture.
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