WHAT IS A SOLE TRADER?
A sole proprietorship also known as a sole trader/sole owner, or simply proprietorship is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the sole owner (proprietor / trader). All assets of the business are owned by the owner (proprietor / Sole trader)and all debts of the business are his/her debts and he/she must pay them from their personal resources. This means that the owner has unlimited liability. It is a “sole” proprietorship in the sense that the owner has no partners (partnership).
This is the most straightforward structure for a business. Basically it means the business decisions are being made by one person. Of course, it doesn’t necessarily mean that the business has only one worker. The sole trader can employ others to do any or all of the work in the business.
A sole proprietor may do business with a trade name other than his or her legal name. This also allows the proprietor to open a business account with banking institutions.
WHAT ARE THE ADVANTAGES OF FORMING A SOLE PROPRIETORSHIP IN PAKISTAN?
The main advantages of a sole proprietorship (sole ownership) are that:
- Sole Proprietorships are easy to start up
- Sole Proprietorship are subject to fewer regulations relative to other types of businesses,
- the Sole Proprietorship owner has full autonomy with regard to business decisions,
- Sole Proprietorship are easy to discontinue as well.
- Another significant advantage is that one takes all the profits of the business. This is the main reason that most businesses are of this type.
- A sole proprietor usually has a quick decision process and doesn’t have any opposition when making a decision as he / she has total control of his or her business. All profits and losses accrue to the owner.
- The owner does not have the tension regarding conflicts among the partners as there are no partners. Also it’s easy to set up, with having little paper work to fill in and little money spent on setting up, this is one of the easiest types of business to start.
WHY THIS TYPE OF BUSINESS?
- This type of structure is ideal if the business is not complicated, especially if it does not require a great deal of outside capital.
- There isn’t much paperwork in establishing this type of structure.
- You don’t want to use your own name and would like to create a brand name. (See also Trademark registrations under intellectual property).
- There are less stringent reporting obligations compared with other structures.
- Sole Owner/Trader is entitled to all the profits and the ownership of assets.
- Sole proprietorship’s are relatively straightforward to wind up.
DOES WORKING AS A SOLE PROPRIETORSHIP HAS ANY DRAWBACKS?
There are a number of disadvantages because of which such forms are finally transferred to better structures such as partnerships and limited liability companies which include:
- Sole Owner/Trader is personally liable for all debts.
- Personal property may be vulnerable for debts, other business liabilities and/or revenue department payments.
- Large sums of capital are less likely to be available to a Sole Owner/Trader , and Sole Owner/Trader may have to rely more on overdrafts and personal savings. Thus increasing his or her cost of borrowing and less rate of return.
- A business may require enormous investments of time without the normal employee recreation leave and other benefits. Sole Owner/Trader being the only beneficiary is also on the other hand the only person standing to bear the losses.
- There may be issues of continuity of business in the event of death or illness.
- A business organized as a sole trader will likely have a hard time raising capital since it has to make up for all the business’s funds. The owner of the business has unlimited liability as he/her is responsible for the business’s debts because she/se has control over the business.
- A disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation, or, a partnership to mitigate such risks.
- Sole Owner/Trader may have only one specialist skill therefore it may hamper diversification of the business.
- Sole Owner/Trader may have the investment but lack the time and resources to look completely into the management of the business.
ARE THERE WAYS OF LIMITING THE LIABILITY OF BUSINESS, SOMEHOW?
Yes, Talk to our attorneys, lawyers and accountants working at Masood & Masood specializing in business formation about the legal ownership of personal assets or the use of trusts to limit liability and reduce tax burden.
For instance, the family home may not be exposed if it is in the name of your spouse — you must get legal advice before you do this, because there are other consequences, especially if the spouse dies or you divorce. Also, you may not be able to do this if your sole purpose is to avoid a creditor.
HOW IS A SOLE OWNER/TRADER TAXED IN PAKISTAN
A sole trader pays tax in their own right, as part of their personal income tax return at the personal rate of income tax.
A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays self employment taxes on the profits made, and files his or her tax returns under section 114 of the Income Tax Ordinance, 2001.
A sole proprietorship also does not have to be concerned with double taxation, as a corporate entity would. Better Tax Planning before commencement of business can significantly reduce/manage the tax burden on the business such as you may be able to deduct tax losses from personal income.
Masood & Masood specializing in business formation and better prompt tax planning to help secure you a prosperous business. we may be assist you in the following:
Pre feasibilty study
Accountancy Support (How to maintain your accounts)
Business name registration
Legal aspects of succession planning
Tax implications as a sole trader
Do let us know and we will be pleased to assist you.