Business Structure – Sole Proprietorship

Advantages and Disadvantages

Sole Proprietorship business structure

One of the most important step in starting a new business is the decision to choose the right legal and business structure.

Considering the planned sources of capital and number of owners, you have to choose the right structure for your business. The common business structure includes sole proprietorship, partnership and companies. It is important to note that these business structures have different legal, financial requirement and benefits. The decision to choose a particular business structure can be complicated in some circumstances. Therefore, it is recommended that you consult the professionals such as lawyers or accountant before concluding about the business structure. This is even more important if you are not setting a sole proprietorship firm or general partnership.

Impact of the Business Structure.

As mentioned earlier, your business structure affects certain status of the firm. Here are few impacts of the business structure on the firm and it owners.

  1. Tax requirements and rates. The tax rate for sole trader / individuals are different from that of companies in many countries.
  2. The personal liabilities of the owners. For example a sole trader always have unlimited liabilities.
  3. Number of documents you will be required to submit for registration also depends on the type of business
  4. Business structure also affects the number of periodic reports and filling you will do with the authorities.

With the aim of sharing more information about the business structures, we will be sharing 3 part article on sole proprietorship, partnership and companies. This article focuses on Sole Proprietorship.

Sole Proprietorship

The most common and simplest form of business is a sole proprietorship. It is a business formed and owned by one person. Many small businesses operating in the Gambia are sole proprietorship. An individual proprietor owns and manages the business and is responsible for all business decisions. The owner is also personally responsible for all the debts and liabilities incurred by the business.

The paperwork and setup formalities for sole proprietorship are substantially less than those of companies. This make it faster and less costly to start a business as a sole proprietor. For instance, if the business cannot pay the money owed to vendors, the owner can be sued individually.

Sole proprietorship are commonly registered under the name of the sole owner or use of a fictitious name with “trading as” or “doing business as”. For example Lamin Joof may register his business name as Lamin Joof T/A LaminJ Enterprise.

Advantages of Sole Proprietorship

    • One person business, meaning fast decision making process
    • Easy to established and limited paper work requirement
    • All profit and losses are for the owner
    • Can easily adapt to change

Disadvantages of Sole Proprietorship

    • Personal liabilities – The sole proprietor is not a legal entity and the owner can be held personally liable for the debts and obligations of the business. This includes tax, debt and employee’s activities.
    • Cannot easily raised capital from outsiders which normally affect the business growth abilities.
    • Key man risk – continuity can be affected if the owner is sick or died

Sole proprietorship business structure is simple and easy to set up. However, like other business structures, you must obtain relevant license and permits before operating to the public. For example, being a sole trader does not mean you can start operating “school” without the approval of department of education.

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