Sole Proprietorship: Advantages & Disadvantages

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Do you dream of leaving your current job and opening your own business? Do not worry, there are a lot of us in the same boat as you who ponder investing in ourselves and launching our own venture. There are many legal formats out there that one can adopt when considering what kind of entity to open.

For instance, there are partnerships, sole proprietorships, corporations, limited liability companies and much more. Your decision will depend on a range of variables such as the nature of your business, the number of stakeholders involved etc.

A sole proprietorship is a business endeavor owned by one individual. It is the easiest form of business to commence and to operate. The United Kingdom is home to almost three million sole proprietorships. One person alone bears the costs of liabilities and benefits from any profit potentials as well.

If there are any structural transformations or process upgrades, the owner alone implements them. The owner also bears all of any associated business risk. It is because of this that authorities are not as stringent in regulatory laws with sole proprietorships as compared to other classes of business.

As with any kind of corporate category, a sole proprietorship comes with its own set of advantages and disadvantages. Under this umbrella, you will be the single possessor of all assets and associated profits of your business. If you choose to function as a sole trader in the United Kingdom, then you are required to register as “self-employed” with HM Revenue & Customs. An annual self-evaluation of your business position, standing and performance will be submitted for declaration purposes of taxes.

Advantages

Control

As the single owner, you will be accountable only to yourself and have complete creative independence in how to run your venture. All decisions pertinent to human capital, security such as mobile patrols for your offices, budgeting, marketing, and growth will be within your scope of control. If you have experienced extremely bureaucratic environments where the decision making power lies with a couple of senior individuals at the top-then this characteristic of a sole proprietorship will greatly appeal to you.

Not only that, you will be able to build the kind of culture you want and steer your company in the direction that your vision entails. There will be no shareholders, board of directors or C-level executives to inhibit you from achieving your mission.

Flexibility

Given the flexible structure that a sole proprietorship offers, you will be able to adapt to environmental changes quickly. For example, if a certain trend goes viral on social media (such as the Mannequin Challenge did a couple of years ago), you can incorporate that in your own digital promotional strategies and link a value offering to it.

Apart from increasing your business responsiveness, you will also be able to enjoy a certain degree of flexibility on a personal level. Being your own boss means you can decide your own working hours and your own projects.

The fun part is that you can also pick where you work from (unless you are the more grounded type who has rented and can afford to rent an office) and take a walk in the middle of a sunny, clear day if you like. There will be no three-piece suit to adorn nor any restrictions on your lunch break.

Lower Capital Injections

Generally, the scope of operations under a sole proprietorship is limited in nature and does not require a massive capital investment. There will be no need to hire a large workforce nor lease a huge office space. Fixed costs can be kept at a minimum by working from home with the assistance of a reliable, fast internet connection and your trusty laptop.

Straightforwardness

The beauty of establishing a sole proprietorship is that it can be done quite simply. There are no complicated procedures or paperwork to submit to any authority nor does it necessitate the need to recruit a lawyer. Usually, you can indicate any losses and profits as part of your annual personal income tax return.

Customized Service

As stated, the relative size of your business will allow you to be more responsive to changes. It will also act as a proponent of offering more personalized service to your clients and help you build a loyal customer base. Not only that, overall brand loyalty will increase as well.

As a sole trader, you will be able to design a product or service tailored to cater to the specific needs of individual customers. It will definitely become your unique selling point, especially if you are in the service industry (event planning, clothes designer etc)

Disadvantages

Liability

The greatest drawback of incorporating a sole proprietorship is that the owner is personally liable for the performance of his venture. As there are no legal boundaries between him and his business, creditors can sue him for his personal assets and properties if he is unable to pay his dues. This means that your personal home, valuables and savings can be jeopardized if your business gets into any kind of trouble.

Access of Finance

Sole business owners may encounter significant challenges when attempting to raise funds. Banks are reluctant to provide loans as there is no legal separation between the owner and commercial operations. Repayment becomes a huge concern if the person in question passes away or if the business suffers. Prospective investors will also feel that there is too large a risk involved in placing their funds in a new business model.

Lone Decision Making

Whilst a sole proprietorship’s flexibility and independence is appealing, it does come with a cost. All the burden of achieving business success rests on one person’s shoulders as there is only self-accountability. With nobody to answer to, all the key decisions will be made by you.

Reverse Economies of Scale

Larger companies are able to benefit from sales promotions, trade discounts and bulk buying. As a small operation, you may not be able to procure items at lower unit costs as compared to corporations or multi-nationals.

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