Sole proprietorship is Definition, benefits and types

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Sole proprietorship is one of the simplest systems for running a private business. Anyone can register as an individual entrepreneur today, and a huge number of positive aspects of this particular form of business makes more and more people join it. In our article, we will try to give a clear definition of this type of business activity, as well as talk about the main types and advantages over other forms of business.

Definition and essence

So, a sole proprietorship is a small-sized company, the owner of which can also be its employee (for example, holds the post of director or accountant). One of the most important features of this form of business is that the owner of the enterprise can only beone person. Of course, he can unite in cooperatives with other companies, but all managerial work lies with only one person. Also, the owner of the company is solely responsible for all arising production circumstances.

How does an individual private enterprise differ from a joint-stock company? This question is often asked by new entrepreneurs. We answer: a joint-stock company is a private company or a group of enterprises, the authorized capital of which is divided into a certain number of shares acquired by investors. Whatever one may say, outside people and their money will be drawn into such a business, and in a private enterprise, all income goes only to the owner, because he built his own business, without any investment.

Benefit of sole proprietorships

Small firms owned by one person rather than a circle of founders have a number of advantages over large joint-stock companies. The list below shows only the main advantages that a novice entrepreneur should pay attention to:

1. Concentration of all profits around one person - the owner of the enterprise.
2. The ability to make decisions that do not depend on the opinions of other business participants.
3. Simplify business through participation in business.
4. Independence of the business owner from other firms or individuals.

Thus, individual enterprises are ideal forpeople who have just decided to start a business. After all, the owner is responsible for his actions only to himself and receives a profit equivalent to the invested forces.

Disadvantages of sole proprietorships

In addition to the advantages described above, small individual enterprises also have a number of significant disadvantages that can scare away a person who decides to organize a private business. In the list below you will find the main nuances that an entrepreneur should pay attention to:

1. The business owner bears property liability, including personal liability.
2. Solitary commitment to decision making can be devastating.
3. The lack of investment in the enterprise complicates the process of its development.

That is, you should correctly weigh all the advantages and disadvantages before deciding to invest in a private enterprise. It may be much more profitable to become part of a limited liability company or to organize a joint-stock company that issues securities.

Partnerships of individual enterprises

Now you know that an individual private enterprise differs from joint-stock and state enterprises in that all profits are concentrated around one person. However, this does not mean at all that in such a business there is no place for various forms of association. One of the most common cooperatives is a partnership, the types of which are described below:

1. General partnerships. Organizationof this kind is based on the principles of solidarity and full responsibility. Participants in this form of business are responsible to each other not only with the property of the enterprise, but also with personal property.
2. Limited Liability Partnership. The difference from the previous type is the presence of less responsibility to the participants of the cooperative. In case of bankruptcy, the participant loses only his business.
3. Mixed partnerships. This form of business includes not only business participants, but also third-party investors, for whom the person who accepts the investment is responsible.

As you can see, with the help of a partnership, you can significantly expand your opportunities for business development, but along with this, there is a certain responsibility to other participants. That is, an individual enterprise to some extent already ceases to be completely individual, and the owner risks losing not only his business, but also his personal property.

Legal status of individual business

Sole proprietorship is a form of business based on the personal responsibility of the entrepreneur. However, this does not mean at all that a businessman has unlimited rights and freedoms. As in any other form of business, the entrepreneur is responsible to the state. In case of violation of the established rules, the property of the company and even the personal property of its owner can be seized in favor of the state.

Most often such offensesassociated with the wrong organization of hired labor. Therefore, if you decide to organize production and hire several workers for this, you must comply with all the rules of the labor code, otherwise the state may fine you and deprive you of the right to do business.

Can an entrepreneur be an employee?

A self-employed enterprise may need several workers who will have to pay wages that cannot be less than the living wage. However, for a small business, even 10 thousand rubles can be a huge amount that you don’t want to part with. That is why many people ask the question: "Can an individual entrepreneur be an employee of his business at the same time?".

We answer: yes, it can, however, he will still be registered with the tax service as an individual entrepreneur. Although no one forbids hiring your own wife or son and paying wages to relatives with contributions to the pension fund.

Forms of sole proprietorships

Based on the information described in the previous section, there are two forms of enterprises based on whether the owner is employed or employed:

• Sole proprietorship - use of hired labor;
• self-employment – self-employment.

Each of these forms has both its own characteristics andshortcomings, so you need to choose wisely. Do you have enough time and energy to manage things when you have to work with your own hands, or would it be better to hire assistants?

Small Business Efficiency

If an individual private enterprise is mentioned in a conversation, then it is most likely a form of small business. Of course, compared to large joint-stock companies, such organizations do not have such a large capital, and the number of jobs is very often limited to one dozen. However, this does not mean that the efficiency of small businesses is small.

Firstly, the state strongly supports such activities with various cash subsidies and grants, which come in handy for start-up businessmen. Secondly, the absence of large capital investments allows you to develop much faster than building a large company and starting to make a profit. And thirdly, quite often the success of an enterprise depends on the creative approach of the entrepreneur.

Registering a Sole Proprietorship

As mentioned earlier, setting up a sole proprietorship is a relatively simple process that does not require much effort. Anyone can become a business owner today. Registration of all necessary documents takes about 10 days, and the cost of the state fee is from 800 to 1000 rubles (depending on the region).

Other investments depend on complexityan enterprise that is planned to be organized, but usually they do not exceed several million, or even total a couple of tens of thousands of rubles. If you want to register as an individual entrepreneur, then you should contact the tax office of your city for this. From the documents you will need only a passport and a receipt for payment of state duty.

Factors for creating a successful enterprise

Before organizing any business in your city, you must first explore a certain market segment in which it is planned to develop a particular enterprise. It is also necessary to draw up a competent business plan that would take into account all the necessary expenses and the approximate level of income.

Well, the face of an individual enterprise is high-quality service and good advertising, so you should think over these nuances in advance so that customers are satisfied after the very first days of opening. Business PR can be carried out on various platforms: the Internet, television, radio, newspapers, and so on. However, most experts recommend using flyers for aspiring entrepreneurs - a cheap and practical option.

Enterprise is an independent market entity

Do not forget that the manufactured products will have to be sold somewhere. To do this, you can conclude agreements with wholesalers or engage in retail trade on your own. In both cases, another feature of individual enterprises is manifested -the ability to independently set prices for products. If you are not involved in the production of basic foodstuffs (bread, milk, eggs, meat), which should always remain publicly available, then no one forbids you to set a price that will match the quality of your products.

This statement is especially relevant for such forms of business that are based on professional creativity. You have the right to demand for a painted picture or sculpture such an amount of money as you see fit, and the state does not restrict your freedom of action in any way. Well, or you can stick to the prices of goods and services that your competitors dictate so that your products are always in high demand.

Can I not pay taxes?

Sole proprietorship is a form of business, and any business should be taxed as a percentage of total profits. However, there are various options that allow you not to pay taxes for a certain period of time. For more information about tax holidays, contact your local legal center.

As mentioned earlier, the state is meeting the needs of small business owners, so getting such benefits will not be difficult, especially if your business falls into a certain category, the products of which your region needs. For example, in the Southern Federal District, the state not only sponsors the greenhouse business, but also releases entrepreneurs for two yearsfrom taxes.

Video and conclusion

If you still have any questions about starting a business, we strongly recommend that you watch a short video that tells about the rules for registering individual entrepreneurship, which are also relevant in 2019. In it you will find step-by-step instructions, as well as a list of necessary documents that may be required for registration.

We hope you now have a better understanding of how a sole proprietorship differs from a joint-stock company. The latter are focused on attracting outside investors who can also participate in the company's affairs. An individual entrepreneur invests his own funds in business development, however, only he gets the full proceeds.