Before we list the advantages and disadvantages of being a Sole Proprietor, it will be better if you are aware about all the options that are available for registering your startup with as a legal business entity and to know all these options, please refer to this article http://www.startupfreak.com/options-for-registering-your-company-in-india/
Now coming to Sole Proprietorship, Please read How to Setup Sole Proprietorship in India if you are not aware how to go about setting up your firm as a Sole Proprietor. This Article focuses on letting you know the pro’s and cons of such an entity and to make you aware before you step into it.
Advantages of Sole Proprietorship Business entity
Ease to Start and Easy to Close
Setting up such an entity is very simple you just have to start thats it and no legal registration with government bodies is need except in some cases you may have to get some Business Licenses which is very easy and fast. Even when you want to close there is no government interventions you can do so at your own discretion. As the name indicates its your sole decision to either start, transfer, sell or to close your business.
Let it be the profits or loss, you will have complete control and complete ownership of the both, thats why it starts with you and ends with you. Its completely your will to decide on the working timings and holidays of your business. No government or any other can intervene. There are no annual reports to file with and fees to pay to the state, no required annual meetings, etc.You have nobody to answer to.
Low Cost formation and management
Absolutely no extra cost is required for formation, you just need the capital for starting your business and no other legal cost is incurred, which in other cases of registrations goes somewhere from 20,000 to 50,000 as legal cost. You can read how a private limited company is formed here http://www.startupfreak.com/4-step-registering-your-startup-in-india/. In some cases you have to get business Licenses which will be of minimal cost to you. Even the management cost comes down as you are not required to hire a specialist for guidance and no Charted Accountants are required for auditing your annual statements, As no extra corporate taxes are paid you will be filing returns as an individual as part of personal income tax.
Disadvantage of Sole Proprietorship Business entity
Lack of Resources
As no legal registrations are done for the business, people tend to trust these entities less. It will be difficult for getting Loans from banks as you may have to pledge yours personal property as collateral. Even no angel or capital investors will show any interest in investing in a Sole Proprietorship Business entity. In a private limited company, you always have the option of trying for a debt-for-equity swap. This is the major drawback of this entity as entrepreneur has to operate on limited resources available to him which is coming from personal savings, borrowing from friends, relatives and financial institutes. Managerial capacity also will be less as it is up to one person to handle all the processes.
One of the main reason people go for registering their companies is to safeguard themselves from the liabilities which the business may incur, in which case the personal savings and assets are safeguarded. Imagine a case where your product or service causes huge loss to some other person or business…. in these kind of cases personal property and saving of the owner of sole Proprietorship is dissolved to clear the debts and penalties. But in Private limited companies it is limited only to the company to pay back the business debts.
Lack of Credibility
Credibility issues can come as the business can end with the owner wish, with in-capabilities or with his/her death. Customers, investors and government credibility depends on how reliable is that one person who is running the show, in most cases it is very difficult to build such credibility. Sole Proprietorship is perceived to be a small enterprise with limited capabilities. So if you have big plans for expansions and making your business big then it is advised that you convert your entity to private limited company as soon as possible as it will suit the business model to scale and raise investment faster.
With these advantages and disadvantages, i am sure you will be able to take an informed decision and grow in your respective businesses. Last but not the least this form of business entity is a boon to society as it promotes self employment and serves the community.