What is a Sole Proprietor
A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity.
The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor. The owner needs to report the business income on their tax return and pay the taxes for it.
A sole proprietorship can operate under the name of its owner, or it can do business under a fictitious name. The trading name is just a business name and doesn't create a separate legal entity from the owner.
Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.
What are the advantages of a Sole Proprietorship
- Simple to establish and operate
- Owner is free to make decisions
- Minimum of legal requirements
- Owner receives all the profits
- Easy to discontinue the business
What are the disadvantages of a Sole Proprietorship
Unlimited liability of the owner
The owner is legally liable in their personal capacity for all the debts of the business. Creditors may attach not only investment or business property, but also any personal and fixed property. The owner signs contracts in their own name because the sole proprietorship has no separate identity legally.
Limited ability to raise capital
The business capital is limited to whatever the owner can personally secure in their name. This places limits on the expansion of a business when new capital is required. A common cause for failure of this form of business organisation is a lack of funds. This limits the owner's ability to run the business well and stay afloat when making little profit or facing economic difficulties.
Limited skills
One owner alone has limited skills, although he or she may be able to hire employees with sought-after skills.
Frequently asked questions
How do I start a Sole Proprietorship
Starting is as simple as deciding what industry or business activity you want to trade in and then starting the activity. No registrations are required unless you are in a profession that requires licensing and professional memberships. Other than that you will be good to go.
Must you register your business if you are a sole trader
A Sole Proprietorship is an unincorporated business. It doesn't have to be registered as the sole trader declares the trading activity in their personal capacity.
What happens with personal assets when you are a sole trader
If the assets are used for the trading activity then they will form part of the business expenses and result in lowering the business profits.
What is the tax rate of a sole trader
The sole trader will be taxed on the individual tax brackets as they are personally liable for the tax.
How do you file tax as a sole trader
Your personal tax returns will contain the profit and loss of conducting business as a sole trader.
Do I need a business plan as a sole trader
When you start a business it is always good practice to have a business plan in place. This is the roadmap forward and will help guide the business owner as they grow the business.
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