There are three legal forms a business can take. Each as its own advantages and disadvantages. Before legally defining a business endeavor, it’s important to evaluate the possible pros and cons.
A proprietorship is most simply defined as an individual in business for himself. It is probably the simplest way to form a business but there are significant risks involved as well. The proprietor manages the business and collects the profits made for personal gain. The law makes no distinction between a proprietorship and the proprietor.
Businesses that often function as proprietorship include retailing, small scale farming and other professions of the sort. They include mainly businesses that can be run without large investments.
The Pros of a Proprietorship
- Lacks legal form
- The proprietor can pocket whatever profits are made
- Because proprietorships aren’t legally distinct from the proprietor, the business can do anything an individual can do
- Not subject to income tax apart from the proprietor (Can be an advantage but it depends on the circumstances)
The Cons of a Proprietorship
- Any business creditors have legal right to demand payment from the proprietorship as well as from the proprietor’s personal wealth
- Unclear distinction between what things are business and which are personal making everything a proprietor owns vulnerable to collectors
- Dependent on one individual for its existence and continual success
- Not subject to income tax apart from the proprietor (Can be a disadvantage but it depends on the circumstances)
If the business operates on a small scale and relies on many of the proprietor’s own resources to function, classifying it as a proprietorship may bring some tax advantages and legal flexibility that a business owner might find attractive.