One of the fastest-growing startup scenes in the world, India offers many opportunities for those planning to start an entrepreneurial venture. But to create a successful startup, entrepreneurs need more than a great startup idea. They also need to understand a startup’s legal structure, startup financing options, startup market trends, and other startup process-related difficulties. Startup guides help entrepreneurs gain all this information in order to act upon their startup plans. Startup guides help entrepreneurs in complying with government regulations, minimise startup risks, provide effective startup optimisation, and also help them in taking well-informed startup decisions.
What is a Sole Proprietorship?
Sole proprietorship is the most basic and common business structure, commonly used by small vendors, professionals, and entrepreneurs. This is an unincorporated form of business that is controlled, owned, and managed by an individual who also faces all the risks and benefits associated with the organisation.
Sole proprietorship refers to a type of business entity that is wholly owned and controlled by one individual who contributes capital and is fully accountable for all profits and losses. The business is carried out under a name and does not come under a separate legal structure, such as a corporate or partnership business.
Features of Sole Proprietorship
- Single ownership: The business belongs to and is financed by one person and is run by him only.
- No separate legal entity: It is recognised that the owner and the enterprise are the same entity. The owner holds all rights and responsibilities of the enterprise.
- Unlimited liability: In cases of loss or insolvency, personal assets of the proprietor may be used to pay off business liabilities.
- Full Control and Management: The proprietor maintains full control over the operations, policies, and decisions without requiring consultation with others.
- Easy formation and closure: Sole proprietorship is highly flexible since it does not require many formalities when starting or closing.
- Direct Profit Entitlement: All income derived will belong solely to the proprietor, with no requirement to distribute it to others.
- Limited capital resources: The capital may be limited to the savings or loans of individuals.
Benefits of Sole Proprietorship
- Simplicity of Operations: It is easy to set up, operate, and wind down the business with fewer statutory requirements.
- Rapid decisions: Since all decisions are made by the owner, things can be implemented very quickly in reaction to market trends.
- Confidentiality: Information about the business, profits, and strategies is not publicly disclosed. This is unlike other organizations which operate in public.
- Direct motivation: The owner is well motivated as the profits directly reward personal effort.
- Personal customer relations: It is less expensive and easier to comply with, making it favourable for small businesses and start-ups.
- Personalised Customer: Being directly involved by the owner usually translates to enhanced consumer relations and service delivery.
What is a Company?
A company refers to an organised and formal form of a commercial organisation, which is established under legal provisions, that in India, is mainly governed by the “Companies Act 2013.” This procedure by which a company is formed is called “incorporation,” and the company has a separate legal life of its own, which distinguishes it from any other person.
A company is an artificial legal entity that is created by a group of individuals or companies to carry out commercial activities to earn a profit or to attain a lawful object. As a result of its inception, it gains a separate existence that makes it eligible to have its own property rights, contracts, and name.
Features of a Company
- Legal separate entity: A corporation is an entity that has a separate existence from its stockholders. The properties and liabilities of the corporation belong, not to the members, but to the corporation.
- Limited Liability: The liability of the shareholders is limited only up to the unpaid amount of shares held by them, protecting the personal assets from business risks.
- Continuous succession: A corporation has an existence that goes on uninterrupted. Neither the transfer of ownership, death, nor bankruptcy of its members will interrupt the continuity.
- Artificial Legal Person: As opposed to a natural person, a corporation is a juridical person that has the ability to sue and be sued, own properties and enter into contracts.
- Separation between ownership and management: Stockholders own the business, whereas management is carried out by the board of directors, which is appointed to monitor the operations of the organization.
- Transferability of shares: It is possible to transfer some or all of the shares of a company in compliance with certain legal regulations.
- Common Seal (Optional): Companies may also have a common seal, which is used as their signature, despite the fact that the requirement to have a common seal is not compulsory anymore.
Benefits of a Company
- Limited Risk Exposure: Shareholders lose definite financial harm, making it a safer point for investment options.
- Ease of Raising Capital: Firms are able to raise money through equity shares, preference shares, debentures, and institutional funding.
- Incorporated Better Credibility: They get more credibility with their investors, banks, suppliers, and consumers because of regulatory monitoring and disclosures.
- Management: The engagement of qualified directors and executives will guarantee effective decision-making and optimal performance.
- Scalability and Growth Potential: The organisational structure enables easy expansion, diversification, and penetration into new markets.
- Regulatory Recognition and Stability: Being regulated through statutory laws is conducive to stability and confidence.
Sole Proprietorship Or Company – Which Is Better?
A sole proprietorship and a company are two different modes of conducting commercial organisations, and each has a number of differences between them, such as their status, capital structure, liability, and obligations.
1. Legal Status
- A sole proprietorship does not have a separate legal existence from the entrepreneur. The sole proprietorship and the entrepreneur are considered one in law.
- On the other hand, a corporation is recognised as distinct from its shareholders (owners). It has the capacity to own goods, enter into agreements, and litigate or defend itself against litigation in courts.
2. Ownership
- A sole proprietorship is controlled and operated through a sole proprietor who provides funds for investment.
- In a company, the ownership may be held by one or more shareholders, depending on whether the company is public or private, with the ownership reflected by shares.
3. Liability
- In a sole proprietorship, the liability is unlimited. The personal assets of the proprietor can be used to pay the debts of the business.
- In contrast, the liability of the shareholders of a company is generally limited to the amount not paid on the shares or the warranties provided, providing a level of protection against potential risk.
4. Management & Control
- The sole proprietorship is controlled by its owner alone, who makes personal decisions.
- The company is run by the board of directors, which is elected by the shareholders. This results in the separation between the ownership and the management.
5. Continuity of Business
- Sole proprietorships are not perpetual in their nature, and their life comes to an end upon the demise, insolvency, or incapacity of their owner.
- This means that a company has continuous succession and that the company will continue even after changes occur in its ownership or management.
6. Capital Formation
- In a sole proprietorship, capital mobilisation is limited. It depends on personal savings or borrowing.
- The company can raise a considerable amount of funds through the issue of shares, debentures, and other financial instruments.
7. Legal Compliance
- A sole proprietorship requires limited legal formalities and disclosures.
- Several areas of statutory obligations on a company include incorporation, audit, filings, and disclosure. A company is faced with broad statutory obligations, such as incorporation,
8. Transferability of Ownership
- The ownership in a sole proprietorship cannot be transferred without selling the business as a whole.
- In a company, ownership can be easily transferred through the transfer of shares, provided that it is allowed under prevailing laws.
9. Profit Distribution
- In a sole proprietorship, the owner gets to take home all the profits, which are treated as personal income.
- In a company, profits accrue to the organisation and are shared with its members in the form of dividends.
10. Taxes
- In a sole proprietorship, taxation is based on individual tax slab rates.
- The company will be taxed based on corporate taxes, which could be different from the taxes payable by individuals and may also have rules for taxes on dividends.
11. Risk and Stability
- In a sole proprietorship, there is more personal risk with a sole proprietorship since it has unlimited liability.
- The company will provide a sense of stability and credibility, and work towards risk reduction owing to its structure.
12. Scope of Growth
- Sole proprietorship is appropriate for small businesses that have fewer expansion plans.
- It is more applicable to medium to large companies with the vision to grow and expand in future.
Conclusion
Whether to form a sole proprietorship or a corporation is a big decision for any entrepreneur, as it directly affects the risk, liability, and scaling-up aspects of the business. Sole proprietorship is the most simplistic form of a business, fully controlled by the owner, with less overhead, ideal for small-scale businesses or start-ups. A corporation, on the other hand, is ideal for a business as it offers liability protection, credibility, and ease of securing funding, which is a core component for scaling up a business and thus a successful entrepreneurial venture.
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