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A STUDY ON RISKS AND THREATS INVOLVED IN SOLE PROPRIETORSHIP
1S. Madhu Balaaji ,
2Dr.A.Jency Priyadharshany
1BBA LLB(Hons), Saveetha School of Law, Saveetha University, Saveetha Institute of
Medical and Technical Sciences ,Chennai77, Tamil nadu, India.
2Assistant Professor,Saveetha School of Law, Saveetha University, Saveetha Institute of
Medical and Technical Sciences ,Chennai77, Tamil nadu, India.
[email protected] , [email protected]
Abstract
This article aims to provide knowledge about sole proprietorship and what
are the merits and demerits of this type of ownership and most of all stressing upon
the risks involved in setting up a business as a sole proprietor. This also attempts to
lay down steps on, how to set up a sole proprietorship and how to manage it. A sole
proprietorship, otherwise called a sole trader, is an unincorporated business with a
solitary owner who pays individual income tax on benefits earned from the business.
In other words it can called as the type of entrepreneur who has full authority and
control over his business and s answerable to no one but himself. With little
government control, a sole proprietorship is the least difficult business to set up or
dismantle, making sole proprietorships mainstream among singular self-contractual
workers, specialists or entrepreneurs. Many sole proprietors work together under their
own particular names in light of the fact that making a different business or exchange
name isn't fundamental. More often than not, when a sole proprietor tries to
consolidate a business, he rebuilds it into a LLC. To begin with, the name of the
organization should be accessible. On the off chance that the coveted name is free,
articles of association must be documented with the state office where the business
will be headquartered. After printed material is recorded, the entrepreneur must make
a LLC working assertion, which plots the business structure. At long last, a work
distinguishing proof number (EIN), like a Social Security number for organizations,
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should be gotten from the Internal Revenue Service (IRS).
Keywords: Business, Entrepreneur, Organization, Sole proprietorship, Sole proprietor,
Utilize.
Introduction:
A sole proprietorship, otherwise called the sole trader or just a proprietorship,
is a sort of big business that is claimed and keep running by one common individual
and in which there is no legitimate qualification between the proprietor and the
business substance. The proprietor is in coordinate control of all components and is
lawfully responsible for the funds of such business and this may incorporate
obligations, credits, misfortune, and so forth.(Ding 2009)The sole trader gets all
benefits (subject to tax collection particular to the business) and has boundless
obligation regarding all misfortunes and obligations.(Marandi, Bazmi, and Ameri
2015)Each benefit of the business is possessed by the proprietor and all obligations of
the business are the proprietor's. It is a "sole" proprietorship interestingly with
associations (which have no less than two proprietors).
A sole proprietor may utilize an exchange name or business name other than
his, her, or its legitimate name. (Trishala A , Lakshmi T and Rajeshkumar S, 2018)They
may need to legitimately trademark their business name in the event that it contrasts
from their own lawful name, the procedure fluctuating relying on nation of living
arrangement.(Hollender 2009)A sole proprietor beginning another business includes
his or her incorporating a strategy for success identified with aspirations for
improvement and decided outcomes to be achieved.(Hollender 2009; “Figure 6.2
Administrative Burdens on Starting-up for Corporations and Sole Proprietor Firms,”
n.d.)Sole proprietors are occupied with numerous assortments of industry and trade
and an exhaustive rundown of the essential classes, is found in the North American
Industry Classification System (NAICS).
The determination of a business sort by another sole proprietor is in many
examples, inspired by proper business involvement in a specific field, particularly
those relating to enterprises including the showcasing and offering of characterized
items and administrations. (Schaffer et al. 2018)A vital segment of a sole
proprietorship inside a marketable strategy is the arrangement of an innate rule, for
activities that require executing for a business to accomplish development.(Baron
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2013) The business name and items are basic viewpoints in the establishing of a sole
proprietorship and once chose, ought to be secured. In case of a decided brand name
being sanctioned, data with respect to trademark insurance is accessible from the U.S.
Patent and Trademark Office.(Evans 1981)
Aim of the study:
To find the risks involved in being a sole proprietorship
Material and methods:
The study is collected from national and international journals, books and
publication from various websites which give importance to Sole proprietorship.
Means of finance:
For the sole proprietor there are an assortment of choices in acquiring
monetary help for their business, including credit offices accessible from the U.S.
Private Company Administration.(Greenblatt 2011)The advances are not begun by the
SBA, but rather the organization guarantees advances made by different autonomous
loaning foundations. The essential credit office for private companies offered by this
organization is the 7(a) advance program, intended for general applications. Sole
proprietors can fund true blue (Dr.Lakshmi T and Rajeshkumar S , 2018)working costs;
for instance, working capital, furniture, leasehold enhancements and building
remodels.(Firm) 1966) Numerous and fluctuated private associations and people look
for chances to contribute and subsidies a business that may not fit the bill for
customary financing from organizations, for example, banks. For the sole proprietor,
trying to exploit this office, there are different variables that must be comprehended
and clung to in regards to the advance application.(Wang, Liu, and Li 2008)The Small
Business Administration (SBA), informs there are generally two structures regarding
financing; obligation and value.
For any entrepreneur looking for subsidizing, they should consider the obligation to-
value proportion of their enterprise. (Woodard 2016)This implies the between activity
between the whole of dollars acquired and the money related dollars put resources
into the business. The arithmetic are straightforward; more prominent the back put by
sole proprietors in their business; simpler the acquiring of fund The SBA insights
demonstrate that the lion's share of little enterprises support the utilization of
constrained value financing; for instance, companions and relatives. As per the Small
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Business Administration, there are different private associations arranged to finance
sole proprietor business operations that don't fit the bill for conventional financing
from banks.
These private speculators can give advances, credit lines, renting offices for
gear, or different types of capital, to sole proprietorship that have depleted option
money related assets. It is additionally feasible for these proprietors to get financing
by method for business accomplices or others, with money to contribute. Money
related accomplices are much of the time "noiseless" and in spite of the fact that they
don't take part in any business related choices, they by and large get a level of the
benefits, created by the business. To help sole proprietors, there are business gifts
accessible from the Federal Government or private associations, giving certain criteria
are met. To fit the bill for Federal grants, small Organization must consent to decided
business size and wage principles. For thought with respect to different concede
openings, sole proprietors may apply for a given in their ability as a person. Nearby
governments and state monetary improvement offices, every now and again make
stipends accessible, for Organization that fortify their neighborhood economies. For
any sole proprietor applying for an advance, before beginning the advance technique,
it is fundamental their own and business record of loan repayment is all together and a
la mode. An individual credit report ought to be gotten from a credit department; for
instance, Trans-Union, Equifax or Experian. This activity ought to be started by an
entrepreneur a long time before beginning the getting procedure. The Small Business
Administration indicates that all credit reports got from any source ought to be
precisely checked on to guarantee that all applicable individual data is right. Other
substance in the report ought to likewise be inspected especially that identified with
the past credit acquired, from sources, for example, Visas, contracts, understudy
advances, and in addition subtle elements relating to how the credit was reimbursed.
How to set it up?
A few states have laws commanding that sole proprietorship enroll and get
business licenses. Moreover, you ought to likewise ensure that you have all the
required licenses that enable you to play out your obligations.(Luoma, n.d.)It's
likewise imperative to understand that you ought not to endeavor to utilize your
business as a duty safe house or some other escape clause, as any benefits that your
business sees will mean you as pay for your own expense form. By expansion, if your
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business owes any obligations, you owe those obligations, and lenders can come after
your own advantages if your business can't bear to pay.
Expenses and Sole Proprietorships:
Not at all like a company, which is its own expense substance, a sole
proprietorship does not pay imposes as a business. Rather, on the grounds that the
business and the proprietor of the business are one and the same, the expenses "go
through" the business to the proprietor. This implies all business benefits and
misfortunes are accounted for on the proprietor's assessment form. In the event that
you do set up a sole proprietorship, you should be in charge of paying your
assessments without anyone else's input. (Briggeman, Towe, and Morehart 2009)This
implies in addition to the fact that you should self-withhold charges for the IRS and
the express that you live in, yet you additionally should pay charges for standardized
savings and Medicare. You should take part in an "independent work impose."
Sole Proprietorship Registration:
As a proprietor of a sole proprietorship, you will likely not need to
experience an indistinguishable procedure of enlisting from a LLC or an enterprise.
When you begin your new business, you will basically proclaim that you are running
a sole proprietorship as opposed to recording printed material with the state making a
company.
Practically every city and region in the country requires that any business,
even a sole proprietorship, enlist and pay no less than a little assessment, in any case.
As a by-products of this expense and enlistment, your business will get a business
permit and duty enrolment declaration. Notwithstanding these archives, you ought to
likewise approach getting a government boss recognizable proof number from the
Internal Revenue Service(Furlan 2014) (so you can withhold charges from your
representatives), a permit to offer from your state, and a zoning grant from your
nearby land arranging board in the event that it is required. Likewise, in the event that
you anticipate working together under a name other than your own particular
legitimate name, you will presumably be required to enroll that name as an
"imaginary business name" with your nearby province or state government.
Demerits of Sole Proprietorship:
The sole proprietor of the business can be held by and by subject for the
obligations and commitments of the business. Also, this hazard reaches out to any
liabilities acquired because of acts conferred by workers of the organization. All
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duties and business choices fall on the shoulders of the sole proprietor. Financial
specialists won't for the most part put resources into sole proprietorships. Most sole
proprietors depend on advances and individual advantages for at first back their
business. Some will choose to join once the business has begun to develop, while
different entrepreneurs keep up their sole proprietorship for a long time.
1. Restricted capital:
The monetary assets of a proprietor are exceptionally restricted. His assets are
not sufficiently satisfactory to begin expansive scale operations.(OECD 2015)
2. Absence of specialization:
The administrative capacity of the proprietor is restricted. Every one of the
qualities such a judgment, astuteness, and so on required for achievement in business
are once in a while found in one individual the proprietor is overburdened with an
excessive number of assignments.(Lewis, n.d.)
He may submit mistakes of judgment and his choices might be hurried. Sole
proprietorship can't bear to utilize proficient specialists. Therefore, the advantages of
division of work are not accessible.
3. Boundless risk:
The proprietor is actually obligated for every one of the misfortunes of
business. Dread of loss of individual property because of disappointment of business
makes the proprietor extremely mindful and preservationist.(Calder 2005) Therefore,
the business may neglect to develop and keep pace with new advancements in its
specific field.
4. Unverifiable life:
Sole proprietorship detests coherence of presence. It is dependent on the life of
the proprietor.(Gothard 2017) Business may grind to a halt because of the disease,
indebtedness and demise of the proprietor. His successors may not be sufficiently able
to bear on the business effectively.(Sitarz 2011)
5. Constrained degree for development:
Because of impediments of capital and administration, proprietorship business
can't develop and extend to an expansive size. Its generosity and bartering position are
additionally feeble. (Price, Herrington, and David Haddock 1998)
Therefore, one man control is the best on the planet gave the man is sufficiently
enormous to oversee everything. In any case, such a man isn't accessible.(Fontana
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2010) Along these lines, sole proprietorship is reasonable just for little and basic
organizations.
Findings:
It is found that a sole proprietor may not be a specialist in each part of
administration. He/she might be a specialist in organization, arranging, and so on. An
individual who is to become a sole proprietorship should know all the risks involved
in setting up an enterprise solely and therefore the proprietor must analyze, research
about the market and prepare the funds and then confidently enter the market.
Suggestion:
● Setting up of sole proprietorship is difficult as he has no other person to aid
him through the process.
● The person should carefully make a decision as once decisions are made it
might lead to irrecoverable losses.
● The person should be mentally stable to face loss when it arises which is one
of the key point for the survival in the business world.
● He/she shouldn’t expect profit at the starting period of the business as the firm
or when business is at the growing stage and only when it reaches maturity it
yields profit.
● Should consult experts before taking a decision, that is, he/she must seek the
help guidance of a market analyst or a experienced person in the market to
equip himself/herself for the business world.
If a person is able to provide or is going good with these conditions then sole
proprietorship is a good choice of business or else he/she could look up into
partnership.
Conclusion:
A sole proprietor may not be a specialist in each part of administration. He/she
might be a specialist in organization, arranging, and so on. However might be frail in
advertising. Once more, due to restricted money related assets it is likewise
impractical to utilize an expert supervisor. Along these lines, the business needs
advantages of expert administration. Numerous organizations get their beginning as
sole proprietorships, and some even remain with that structure until the finish of the
business. Sole proprietorships have many preferences: they are snappy and simple to
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set up, they don't require a lot of cash, and bookkeeping is basic. Be that as it may,
sole proprietorships have many impediments also. One man control is the best in the
world provided the man is big enough to manage everything. But such a man is not
available. Therefore, sole proprietorship is suitable only for small and simple
businesses.
Conflict of interest:
I have chosen this topic because in this dynamic world of business, entrepreneurs and
sole proprietors emerge each day, through this paper anyone who wants to start up a
business can know about the risks and threats involved in starting up a business as a
sole proprietor.
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