Question

What are the downsides of being a sole proprietor? What advantages does it have over incorporating?

Answer 1

A sole proprietorship is the most basic form of of business. Here the owner and business are the same.Due to this there ar certain downsides of being a sole proprietor, which are as follows:

1. The business has no distinct legal entity so all the debts and lawsuits become personal debts and lawsuits of the owner.
2. Although the owner of sole propritorship can raise loan from banks, however procurement of loan by a partership firm or a company is easier.
3. The business is believed to be a going concern, but the success of a sole proprietor is depends on owner. If the owner is not able to fulfill the responsibilities of business even for a short period of time, it can cause a serious loss to the business.

Incorporation of a company involves a lot a legal formalities and expenses which are not required be followed while setting up a sole proprietorship business.

The main disadvantage of a company is that ownership and control of the company is in hands of different people.The shareholders have little or no say in the functioning of the company.

The corporations distribute dividends to the shareholders from its after tax profits.However such dividends are taxed again in the hands of shareholders . This leads to double taxation. The sole proprietor business does not face this issue.