The Pros And Cons Of Sole Proprietorships
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Starting a business is no easy feat. New business owners are always being faced by taxing decisions. One of the most important decisions one can make is deciding on the appropriate business structure. One of the most common business structures that small founders choose is a sole proprietorship, an unincorporated entity in which the business and owner are one and the same. This means that a sole proprietor will receive all the profits of their business, but will also be personally responsible for all the losses, liabilities, and debts.
In order to determine if sole proprietorship is the right choice for your business, it is important to learn more about what it is, how it works, how to get it started, and the advantages and disadvantages of doing so.
What is a sole proprietorship?
As mentioned earlier, sole proprietorship basically means that the owner and the business are one and the same. Everything earned through the business is considered personal income. This also means that personal assets and belongings are liable if any outstanding debts need to be paid.
How to register for sole proprietorship?
The first thing you need to do to register as a sole proprietorship is to register with the Companies Commission of Malaysia (SSM). This can be done at your local SSM branch.
You will then need to name your sole proprietorship, either as your personal name, or with a name under which you trade. If using your personal name, you do not have to wait for approval, and your business can start immediately.
If you want to register a business in Malaysia under a trading name, you will have to submit a request to the SSM. You will also have to adhere to some guidelines. Following this, you will need to wait for your name to be approved. Generally, businesses can be registered for any amount up to five years.
However, there are certain costs associated with this registration. There is a fee of RM60 every year if you register under a trading name. Similarly, there is a fee of RM30 every year if you register under your personal name.
Pros and cons
| Pros | Cons |
|---|---|
| Minimal paperwork | Liability lies with owner |
| Simplified taxes | Funding issues |
| Relatively low maintenance | Long-term survival |
| High degree of control | Lack of support |
Advantages
Minimal paperwork
As mentioned previously, setting up a sole proprietorship is not exactly hard. With low set-up costs and minimal paperwork, it is the easiest and cheapest type of business to set up in Malaysia, according to the SSM.
Simplified taxes
With sole proprietorship, you don’t need to separate your taxes. Any profit you make is simply treated as your own income. However, there are two important things to consider:
- Whether or not you withdraw the funds, you will still be taxed on all profits from your business.
- You will need to complete Form B (or electronically file Form e-B (sole proprietor)) detailing your profits and losses.
Relatively low maintenance
Compared to an incorporated entity, a sole proprietorship is much easier to start and maintain. With minimal legal fees and no ongoing state requirements, your business is mostly free to operate as it pleases.
High degree of control
A sole proprietor has complete control over their business and decision-making power lies solely in their hands. Without any partners, you are the sole owner of the business, so run it as you please.
Disadvantages
Liability lies with owner
One of the biggest disadvantages of sole proprietorships is the amount of liability the owner will have to take on. There is no separation between the business’ assets and the owner, which opens them up to creditors of the business to go after your personal assets if the business assets are not sufficient to cover the business debts. Personal creditors can also come after owners to claim business assets to satisfy personal debts.
Funding issues
Raising capital as a sole proprietorship can be a massive challenge, especially since you can’t sell shares of your company. This in turn can make investors hesitant to invest. Getting a loan from the bank is not a bad option, but this can also be difficult as all responsibility for repaying the loan falls on the shoulders of the owner should the business fail.
Long-term survival
Since sole proprietorship is tied to a single owner, it can sometimes face issues with regards to continuity. Should the owner become unavailable or die, the business could very much be dissolved. One way to avoid this is through the transfer of ownership via a will.
Lack of support
Once again, by being the sole owner of a business, owners will likely not have access to much help. While full control may be maintained, owners bear the full responsibility for the success or failure of the business. This can be a significant disadvantage as it can add extra pressure and stress.
Deciding between sole proprietorship or incorporation (Sdn Bhd)
Choosing between a sole proprietorship or a private limited company can be quite straightforward. Sole proprietorships are easy to start, so it is often a popular choice for those just starting out in business. For example, if you are a freelancer and are looking for a cost-effective way to grow your client base.
On the other hand, private limited companies are probably a better choice if you want to grow your company, and want to grow it fast. Consider your business needs from a financial and operational standpoint as well as your goals when reviewing options to make the best choice for you and your business.
Read More: The REAL Cost Of Starting A Business
