Sole proprietorship: meaning, importance and advantages

If you are reading this article, then your confusion is over because we will endeavour to shed light on the intricacies of the sole proprietorship as well as its distinction and similarities with entrepreneurship.

What is a sole proprietorship?

Sole means single. Thus, a sole proprietorship can simply be defined as starting or running a business as a single individual, rather than in partnership with others. They can sometimes be referred to as sole traders.

Sole proprietors are often entrepreneurs and they are the most common owners of small and local businesses as well as small private limited companies. Since a private limited company can be incorporated with a single person being both the director and the shareholder, some capitalists chose this method or legal structure for their companies.

That being said, sole proprietors are generally entrepreneurs but not all entrepreneurs are sole proprietors. More about this in the next subheading.

How do sole proprietorship compare and contrast to entrepreneurship?

There are several ways by which one can compare and contrast the two terms as mentioned. Some of these are – 

1. In the definition – sole proprietors are the don of their business or company as they are the sole founder and decision maker. Entrepreneurs on the other hand are innovators who thrive in making their dreams realities through businesses and startups. While entrepreneurs can choose to stay small (sole traders), they can also choose to have a global impact – as in the case of Amazon and Meta.
2. In the function – a sole proprietor does not necessarily have to be the founder of the business; the business could simply have been inherited or just improve on an existing idea. Entrepreneurs, by contrast, may have inherited the business or chosen to improve on an existing idea with the exception that they are innovators who introduce and infuses cutting-edge ideas into an existing niche.
3. In the impact – an entrepreneur can choose to fund another company in which he is not a director but the sole proprietor is totally devoted to his own business only.
4. In the goal – entrepreneurs seek to make more money; generally, more profit and goal-oriented while the sole proprietor would most like be interested in just making a living out of the business and nothing more. In other words, entrepreneurs are more ambitious.

Attributes and advantages of the sole proprietorship

• Setting up your business as a sole proprietor affords you the capacity of being the sole decision-maker of the business. You don’t have to consult with any partner or board to take and execute any decision. This is most useful when a customer satisfaction decision is at stake.
• The profits from the business are all yours after you have duly paid your tax. The HMRC requires that all sole traders register to pay tax through the Self-Assessment portal. Details about paying tax as a sole proprietor will be discussed later in this article.
• You can choose when and where you want to work. For example, a sole proprietor can choose to work from home without fear of being queried by the boss. He is the don of the company.
• There is a lot of privacy when you set up as a sole proprietor, especially the sole trader. This is because corporations must compulsorily report their annual accounts as well as confirmatory statements to the Companies House at the end of every tax year of the company. The sole trader on the other hand need not do that because his business is not registered with the Companies House in the first place.

Disadvantages of a sole proprietorship

• If the business is set up as a sole trader, you are entirely liable for the liabilities of the company or business. This is because the business is legally perceived as the same entity as its owner.
• If the business becomes too cumbersome and tasking, there is no other person to share the responsibility with.
• You are more likely to pay higher taxes as a sole proprietor who is set up as a sole trader than a limited liability company.
• The continuity of the business is not guaranteed with the demise of the owner except if the prior adequate provision for succession has been made available in a testament. Otherwise, the death of the owner may mean the end of the business altogether.
• Credibility is lower. Whether the sole proprietor is a sole trader or owns a private limited company, the fact remains that access to capital will be limited, especially as a sole trader. If the sole proprietor chooses to set up as a limited company, his business stands a better chance of gaining investors, but not as much as if he is in business with other shareholders or guarantors. 

Salary ranges for sole proprietors

Sole proprietors are allowed to pay themselves from the business. They can either pay themselves in the form of personal allowance or dividends. If you are going the route of the personal allowance, the maximum you can pay yourself without having to pay tax is £12,570 per year.

Choosing to pay yourself in form of dividends also has its own advantage in that there is an allowable dividend payment of up to £2000 as of 2022.

So, if you have chosen to pay yourself in both salary and dividends, then you are allowed up to £14,570 in a year before you have to pay tax.

How sole proprietors pay tax

As mentioned earlier, sole traders who are sole proprietors can pay their taxes to the HMRC through the Self-Assessment portal.

However, sole proprietors who chose to set up as limited companies must pay corporation tax to HMRC as well as personal allowance tax if they are earning salary or dividends from the business. The corporation tax is a tax paid on the profits made from the business while personal tax is for personal income.

Corporation tax is registered for during incorporation with the Companies House or separately with the HMRC if you chose not to do that while initially registering your company.

Also, sole traders must register for VAT payment with the HMRC whenever the taxable income of the business or company sums up to £85,000 or more. While limited liability companies are compelled to register for VAT even before reaching that threshold while sole traders may voluntarily choose to register before reaching the threshold.

Conclusion

The benefits of setting your business up as a sole proprietorship lie in the fact that you get to be the sole decision-maker and profit keeper of your business. 

It however means that you get to bear the liabilities alone too. However, if as a sole proprietor you choose to be an entrepreneur, your business is more likely to thrive and survive.