The sole proprietor is an unincorporated business with one owner who pays income tax on profits from the business. With little government regulation, they are the simplest business to set up or take apart, making them popular among individual self-contractors or business owners. Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.
The easy formation procedure and minimum compliance requirements in a Proprietorship make it a ready option to start a business. However, there are various disadvantages of a proprietorship which start-ups fail to understand at the initial stage.
A review of a some few factors which make a Private Limited Company or LLP a much better option than a Sole Proprietorship are stated as under:
Unlimited Liability:In a sole proprietorship, there is no distinction between the proprietor and his business. The proprietorship firm does not have a separate legal entity of its own but runs on the merit of the proprietor. The assets and liabilities of the firm and the proprietor are considered one and the same. This means that the proprietor’s personal assets can be used to dispose of any outstanding liability of his firm. Thus, the liability is both unlimited and personal.
Limited Capital:In a sole proprietorship firm, there is no option but to rely on the proprietor’s funds for raising capital. Bank Loans can also be obtained but only after a thorough due-diligence as there is no distinction between the assets of the business and the assets of the proprietor.
Difficulty in Raising Capital:It is a known fact that Private Equity firms, Angel Investors and Venture Capitalists always prefer investing in a corporate form of business having an organized structure and a good team rather than a proprietorship, which is mostly run single handedly.