A sole proprietorship is a popular legal form of organization for small businesses. One individual, a sole trader, owns and operates this business structure. It has minimal legal requirements, making it easy to establish and discontinue.
Here are the advantages and disadvantages of a sole proprietorship.
Advantages of Sole Proprietorship
Ease of formation: Minimal legal and capital requirements make it easy to establish a sole proprietorship. It is the most widely used legal form of organization.
Total independence in decision-making: The sole proprietor has complete control over the business. This eliminates the chances of disagreements among owners, which may create conflicts and delay decision-making.
Total responsibility: The sole proprietor is willing to accept total responsibility for the firm’s performance. The survival of the business rests on the shoulders of the sole proprietor.
Retaining all business profits: Since there is only one owner, all earnings go to the sole proprietor. The owner can exercise their entrepreneurial skills to the fullest.
No requirement for authorization and disclosure of financial reports: Financial reports need not be published and checked by authorized auditors. Business affairs can be kept private.
Taxation advantage: A sole proprietor receives favourable tax treatment in the early years of the business. The earnings of a sole proprietor are considered personal income. They may be subject to lower taxes compared to earnings of other forms of businesses.
Confidentiality: An owner is not required to disclose trading figures publicly.
Fewer legal restrictions: A sole proprietor must adhere to a minimum number of formalities and legal requirements to create the business.
Disadvantages of Sole Proprietorship
Unlimited liability: The sole proprietor is entirely responsible for the debts and risks of the business. Failure in the business may mean a loss of personal property.
Lack of continuity: If the owner dies, is judged insane, or withdraws from the business, the business ceases operations.
Lack of experience and ability: Business operations depend on one individual and their ability, training, and expertise, limiting its discretion and scope.
Incurs all losses: Just as the owner enjoys all the company’s profits, they also suffer incurred losses.
Limited access to funds: A sole proprietor has limited access to funds. This means businesses requiring heavy initial investments are seldom operated as sole proprietorships.
Limited skills: A sole proprietor may have limited skills. They may find themselves forced to make decisions in areas of business operations for which they need more expertise.
Long working hours: A sole proprietor will find taking days off for holidays difficult. They may have to work longer than the typical working hours put in by their employees. They may even have to fill in for a sick worker.
The relative difficulty in obtaining long-term financing: A sole proprietor often needs help raising long-term capital because the enterprise rests exclusively on the owner.
Only Malaysian citizens who are permanent residents can register a business as sole proprietors. It’s important to carefully consider the advantages and disadvantages of a sole proprietorship before choosing this legal form of organization for your business.