What is Sole Proprietorship?
A sole proprietorship is a business entity held and operated by one individual without any legal disparity between the owner and the business. A sole proprietorship has several advantages: simplicity, flexibility, and tax benefits. However, it also has disadvantages, such as unlimited liability, lack of continuity, and difficulty raising capital. A sole proprietorship is suitable for small-scale businesses that do not require much external funding or legal protection.
Features of Sole Proprietorship
Formation Simplicity: The initiation of a sole proprietorship entails minimal legal formalities and costs. There is no obligation to register the business name, file articles of incorporation, or establish a partnership agreement.
Absolute Autonomy: In a sole proprietorship, the proprietor enjoys complete authority and responsibility concerning business decisions, operations, and profits. The proprietor can alter the business's nature, scope, or location at their discretion without needing external consultations.
Tax Advantages: Sole proprietorships are not subject to taxation as separate entities; instead, they operate as pass-through entities. This indicates that the business's income and expenses are reflected on the owner's personal income tax return, reducing the risk of double taxation. Additionally, the proprietor can leverage deductions for specific business expenses, including home office costs, travel expenditures, and depreciation.
Confidentiality: Unlike corporations or partnerships, sole proprietorships are not bound to reveal financial information or performance metrics to the public. Moreover, proprietors can maintain a level of privacy by keeping personal and business assets separate, provided there is no commingling or interchangeable use