Business Registration is an important step for any entrepreneur or company. There are many ways to register your business and the sole proprietorship is one of them. Having said that, we must also understand its advantages and disadvantages before registering it.
The motive of this article is to help you know about starting a Sole Proprietorship that could be beneficial for your new enterprise and what challenges you might face due to opting for this route.
A sole proprietorship is the simplest type of business structure. This structure has no existence separate from its owner. The sole proprietor has complete control over the business, and so all profits and losses pass through to the owner’s tax return.
Advantages of a Sole Proprietorship
1. Easy to form
Sole proprietorships are easy to startup, there are few legal regulations or requirements to do so. Furthermore, no regulations make it necessary for you to have any specific training or licenses to start a sole proprietorship.
There is also no requirement that you register your business with the government. As long as you are operating under your name, you don’t need to register your business at all. If you operate under a fictitious name (such as “The Dog House”), then you will need to register this fictitious name with your local government or a registrar of the company’s authority.
Sole proprietorships are generally easier and less expensive to file taxes for than other types of businesses. As a sole proprietor, you report all your business income and expenses on your income tax return. You can also deduct the costs of running your business from your income, to reduce the amount of tax you pay.
4. Complete control
Small business owners have the risk of discord among owners, but with sole proprietorship, there is no such risk. A sole proprietor has complete control over the business. He can make all the decisions related to the business himself and does not have to consult anyone else.
5. Profits are all kept by the owner
Unlike other business structures, the owner has clear ownership. All the profits the business makes all go to the owner. It is totally up to the owner how to use the funds, whether to reinvest in the business or receive a payout from the business.
6. Little paperwork
Starting a sole proprietorship is very easy. All you need to do is come up with a name for the business, file documents such as business permits and licenses if necessary. Then open your business bank account and credit card, and you’re off to the races. This ease of entry makes the sole proprietorship an attractive option for entrepreneurs who want to get started quickly.
Disadvantages of a Sole Proprietorship
1. Personal liability
Because you and your business are one, your assets are at risk if someone sues the business. This makes it difficult to get financing; doing so often requires collateral, such as a home or vehicle.
2. Difficulty raising capital
Sole proprietorships don’t have an easy way to raise money by selling stock in the company, as corporations can do. The most common route is to ask an investor for a loan or partnership.
3. Limited life span
When the owner dies or becomes incapacitated, the business is dissolved. This makes succession planning more complicated because, unlike other types of businesses, sole proprietorships can’t be transferred. With other business structures, a family member or trusted employee can continue operations.
Requirements for Sole Proprietorships
In Botswana, registering a sole proprietor with the register of companies (CIPA) is simple and easy. You fill in a form with a unique business or trading name, the CIPA system will alert you if the name is available or not. What is required is that you register your business under the category of business name.
Once your trade name is approved, you have 3 months to appoint a company secretary.
Why is it Important to Incorporate a Business?
A sole proprietorship is quick and easy to start. However, it has drawbacks that may hamper your business growth and exclude you from other incorporation benefits. Incorporation makes your business a separate business legal entity and so you can lower your personal risk, because of limited liability. This also makes it easier for you to access funding opportunities.
For a startup, this could be the difference between business growth and closing shop. Incorporating your business has several advantages for you to consider.
Whether you are thinking of registering a sole proprietorship or incorporating your business, we can help.