What are the disadvantages of registering a sole proprietorship in India?

sole proprietorship

It is crucial to take into the consideration of sole proprietorship’s advantages and disadvantages. One of the most significant drawbacks of a sole proprietorship is a limitless liability for a business owner, who can be held personally accountable for the business’s duties. You can also not recruit W2 employees (contract workers only), which can make a significant problem if you are planning to expand your business.

Although, there is no law to govern sole proprietorship firm registration in India. But sole proprietorship firm registration can be done with required documents and registration of GST and shop and establishment license in India. It is also crucial to register your company in India from the various business structures available under the companies act.  

Some of the disadvantages of the sole proprietorship include;

– Limitless liability.

If you are a sole proprietor, you will not enjoy the limited liability protections provided in S-corps, LLC, or C-corps. You will be personally liable for your business’s debts and expenses if someone damages your property or is harmed by your business’s goods or products or an err that you make. To put it simply, there will be no legal distinction between you and your business. Some of the sole proprietor’s personal liabilities are given below;

– Expenses generated by your business.

– Debts concerning your business.

– Product concerning liability.

– Property concerning liability.

– Civil damages in case you offer poor or inapt service.

As you have limitless liability in a sole proprietorship, a customer, a vendor, or a lender can come after your personal assets to meet the business’s obligation. Contrary to S-corps, C-corps, or LLCs, there will be a liability shield between owners and a business.

In the LLCs or C-corps, company owners’ personal assets will be protected. Hence, no one can come after the personal assets unless the business owners do something that enables the corporate veil to be penetrated or if the business owner has signed the personal guarantee. If you want to protect yourself legally, then a sole proprietorship is not suitable for you.

– No continuing business life.

If you structure your business as C-corps, LLC, or another formal structure and something unexpected happens to you (like planned exit or death), the business would persist. As long as you maintain proper licensing and keep business fillings current, your business would survive persistently. The same does not happen when you are a sole proprietor. Because there is no such structure to ensure the business’s continuity, a family member or employee might continue in your business. Still, they would be initiating a new company from the beginning, as they cannot continue your operations. Such a scenario cannot allow you to plan for the long-term and make progression plans around your eventual business exit if any.

Also, a sole proprietor cannot even recruit any full-time or W2 employees. Nonetheless, you can recruit 1099 freelancers to get your work done, but you cannot run payroll and retain your employees for the long-term. If you want to recruit them in the future, you must incorporate them as C-corps or S-corps.

– Challenges while infusing capital.

If you expect to infuse the money from outside investors, then a sole proprietorship is not the best option for you. Because there is no real business to sell; hence, it is impractical to infuse money unless you possess tangible assets or IP (intellectual property) that investors can purchase into.

The sole proprietorship does not even possess the equity shares, and there are not even formally licensed businesses. Also, there is no formal review process while taking business decisions or approval process. Shareholders in a sole proprietorship do not have any rights. Due to these various concerns, investors are reluctant to invest money in a sole proprietorship. Likewise, LLP makes it tough to infuse the capital, though you can make an S-corp election, that makes it feasible. Still, you want to infuse the money, especially from investor funds from a VC firm or an angel investor, a C-corp will be suitable for you.

– You will not be able to take on business debts.

As sole proprietorship is not a formally set up company, it is not feasible to borrow a business loan. Instead of that, all debts, even the funds you borrow to expand or operate your business, are personal debt. Lenders would need that any loans be personally guaranteed by a sole proprietor, which means they can go after the personal assets of them in case of default. Because a sole proprietorship is not a separate business entity, you are the business. By giving the personal commitment, you commit to lenders that you would repay any taken loans for business purposes, even if the business fails.

Nonetheless, this might not be so distinct from other structures of business. For instance, if you pvt ltd company registration, there is a chance that you would require to give a personal guarantee while taking a business loan such as an SBA loan. That’s why be sure while making such decisions.

– Recognized absence of professionalism.

Mostly, business partners and customers view sole proprietors as lacking professionalism. People who intend to run a small business out of their house or make some bucks might find it suitable in their spare time. Nonetheless, while choosing what type of business structure you want, it is crucial to take heed of a sole proprietorship’s advantages and disadvantages.

On the other end, C-corps are considered as the most professional structure by the most prominent companies across the world. Because if it offers a more robust organizational structure and oversight requisites, they also offer the most significant liability protection and are apt to infuse the capital from outside.

A sole proprietorship does not offer any formal oversight or management structure. To put it simply, it is someone selling goods or recruiting themselves out for work. Income goes to sole proprietors personally, and bills are needed to be paid from their personal accounts.

Such unprofessionalism can be stemmed out by setting up a small business checking account in your business name. Many would let you use an alias for your business or a ‘doing business as’ (DBA). Nonetheless, this would differ by institutions.