Sole Proprietorships, or businesses with one sole owner, are best suited for small scale businesses with low risk. Although easy to set up, sole proprietorships do not constitute a separate legal entity and thus the owner’s personal assets can be subject to business liabilities.
The advantages and disadvantages of sole proprietorships are as followed:
Advantages:
- Profits: All profits from the business are attributed to the founder.
- Simplicity: Sole proprietorships are simple to set up and run. With only one investor, decisions are made quickly without unnecessary bureaucracy. Also, sole proprietorships can be wound down easily.
Disadvantages:
- Not a Distinct Legal Entity: Sole proprietorships are linked to the sole founder, so all legal actions, liabilities, and risk are carried by the investor.
- Risk: All the risks and liabilities of the company are attributed to the founder. Tremendous risk is involved, and those who wish to proceed with a sole proprietorship should take extreme caution with their investments.
- Debt: The debt of a business is the personal debt of the founder. The founder’s personal assets are at risk if the business comes into debt.
- Limited Investment Opportunities: Only the founder’s capital and profits are injected into the company, making long term growth slow and difficult. Other parties such as banks and investors are aware of the heightened risks and may be less willing to invest.
- Limited Succession: The business is tied to the life of the founder, and ceases to exist on the death of the sole proprietor.