Many entrepreneurs start their businesses as a sole proprietorship due to low compliance requirements. However, as a business grows, it needs change, and the owner may need enhanced protection for his personal assets from business obligations and liabilities as well as a better vehicle to attract investors. As a result, you may need to consider pursuing a more formal business organisation.
Although sole proprietorship has its advantages in regards to decision and control, it has certain limitations which have been hindering your Proprietorship to move further ahead. These benefits can be reaped by converting your Proprietorship into a legal company or LLP . Some of them are as follows:
1. Owners are protected from personal liability for company debts and obligations.
2. Company has a reliable body of legal precedent to guide owners and managers.
3. Company is the best vehicle for eventual public companies.
4. Company can more easily raise capital through the sale of securities.
5. Company can easily transfer ownership through the transfer of securities.
6. Company can create tax benefits under certain circumstances, but note that company may be subject to “double taxation” on profits.
7. Company can have an unlimited life.
As we have come out with above advantages of doing Business in Company Form, this is remarkably because there are various disadvantages of doing business in sole proprietary concern after attaining a certain level. These can be stated as below:
One of the drawbacks of sole proprietorship is that the owner’s money is tied to his business in the sense that finances of the owner and the business are one and the same and that there is no legal separation between the two. If the owner’s business encounters a problem or incurs debt and other obligations, he can risk losing his personal money to settle these issues.
Being the only one to make decisions has its advantages and disadvantages. If problems encountered are complex, it helps to brainstorm with like-minded people whose interest centers on making the business profitable. When it comes to making serious decisions, there will be different views which will provide balance in the management.
Sole owners of businesses often find it hard to go on vacations since they have to look over the company. This can be a setback since their personal life and family can suffer because of too much work and pressure running the company.
Another drawback of single-handedly owning and running a business is paying taxes personally. Since the business and the owner are one and the same, owner has to pay taxes as self-employed.
Sole proprietorships may borrow money just like other business structures. However there is no separation between business and personal assets, many sole proprietors need to use their personal assets as a collateral of the loan.