What is a Sole Proprietorship and How to Establish One

What is a Sole Proprietorship and How to Establish One?

If you have thought of starting a business as a sole proprietorship this article will discuss what sole proprietorship business operation entails, which includes the pros and cons, that come with; formation, taxes, maintenance, and liability.

What is Sole proprietorship?

A sole proprietorship is a non registered, unincorporated form of business of anyone who runs the business as the only owner with no separate between themself and the business through ownership. The sole proprietorship in which the owner bears the sole liability obtains the full profits and is liable in case of losses and debts of the business.

What Distinguishes an Owner from a Sole Proprietor?

A business owner can be either an individual person or a legal entity of any kind that has the legal right to ownership of the business. For instance, a business corporation (which is a legal entity) can own one or more firms.

A sole proprietor is usually the individual (proprietor) who runs the business as a sole proprietorship.

Sole Proprietorship Setup Process

Sole proprietor is the simplest form of business organization. Forming this type of business is not necessary to take any legal steps. With you being the only owner and first to start a business, you are, at that moment, a sole proprietorship. There is no need to fill up any paperwork or send it to the federal, state or local level to be recognized as such.

Business licenses and permits

Keep in mind that in your locality, business licenses and occupancy permits may be required if you own a certain type of business, and that it can be an important factor to consider. Sometimes in some places, a business is not allowed to operate unless the owner has the business license acquired and submitted to the relevant jurisdiction.

If you want to go ahead and know more about the specifications at your location, connect with your county clerk. The county clerk should answer all your questions and if necessary hand or mail whatever forms you may require.

Working under an assumed name

If your sole proprietorship business will be operating except under the owner’s name, most localities too have the obligations for a DBA (“doing business as”) name. A DBA or “doing business as” (DBA) filing tells the local government and the public when the business is operating under an assumed name or when it is owned by someone else.

A confrontation on the issue of “whether to use your real name or a fictitious name” can be a complicated decision to make.  All things being equal, if your brand already enjoys a great reputation in your neighborhood or in your industry; then it will be wise to market your brand with your name.

Anyway, there is a danger to that. If your enterprise or venture fails or gets tangled up in some legal or financial trouble, it will also have your name on it. If you try to start up another business, people may associate with your name and earlier issues.

Getting BR Number

The sole proprietor of Hong Kong business must just register his business with the Inland Revenue Department’s Business Registration Office and obtain a Business Registration Certificate to be able to operate a business. Through the Business Registration process, one month is given after the day of the business commencement. The number of the Business Registration Certificate that appears on it is also the sole proprietorship’s tax filing number for profit taxes.

The main benefits of a sole proprietorship

Expenditure on paperwork and minimal set-up costs are identified as two significant benefits of operating a sole proprietorship. What’s more, it is easy to maintain them. The SBA (Small Business Association) stated that it is the easiest and least expensive business option you can choose.

Now, let’s outline a few more advantages.

Sole Proprietorship Taxes:

In accordance with Hong Kong’s company law, the profit taxes for sole proprietorships are filed on an annual basis. Normally, the first 18 months after the date of registration, the new registered business will be notified by IRD (Internal Revenue Department) about its first tax return filing. The tax return is usually submitted within a month from the date of the provisional assessment notification issue.

The small business whose taxable income does not exceed HKD2 million do not have to attach any financial statements together with the return of income tax. Nevertheless, they need to prepare the accounts and file the tax return in the form of the accounts that they have prepared, and they must keep the accounts and documents for inspection by the tax administration officials.

Sole proprietorship businesses with earnings surpassing HKD 2,000,000 are required to furnish the subsequent documents alongside their tax return.

Sole Proprietorship Maintenance:

Managing and maintaining a sole proprietorship is much easier compared to the process of forming a registered business. You can carry on running your business with just minimum legal expenses and no ongoing state obligations even if you just use a fictitious name, also called as DBA (doing business as).

Sole Proprietorship Control: 

This is the only form of business entity where the sole proprietor has the full authority and decision-making power of the business. No board of directors, you become sole owner and thus, you can run your business as you please.

The Limitations of a sole proprietorship

However, there are a few key limitations to pay attention to as a sole trader. When deciding the best business structure for your business, make sure to think about the possible disadvantages.

Sole Proprietorship Liability:

One of the significant disadvantages of a sole proprietorship is that you yourself will be personally liable for all the debts of the business. The two assets are treated as one, and there is no distinction between the owner’s asset and the business’ asset.

Personal liability allows creditors to use your personal assets such as house, car, etc. as a debt security when the business assets are not sufficient to cover the business debts. Similarly, your business assets may also be subject to seizure by your personal creditors in order to satisfy your personal debts.

Because you will be personally responsible for the debts of the business, you should think of whether liabilities would be brought against the business. However, the business is likely to be exposed to both premises liability, for the customers who are injured on the premises or from products sold by the business. In case of the suits against your business, you should insure yourself from the risks (general liability, malpractice, or product liability, if it is necessary) by purchasing the business insurance. However, if you are not confident about the risk management of a sole proprietorship, you might want to consider a different business form such as a corporation or a limited liability company.

Sole Proprietorship Funding Challenges:

The sole proprietors often experience a huge challenge in the areas of raising funds as they are not in a position to sell shares. Thus, it can make investors to be reluctant to invest. On top of that, the owner may face difficulties with borrowing money from banks as he/she will be the only one to be liable for loan repayment if the business goes bankrupt.

Sole Proprietorship Low Sustainability

One of the more glaring disadvantages is that a sole proprietorship cannot be sustained in the event the owner passes away or becomes incapacitated. Unlike a corporation, which is a separate legal entity from its owners and can be transferred to another person, a sole proprietorship has no separate existence but is dependent on only its owner for its operation.

Sole Proprietorship Lack of support: 

The single person in charge has complete control as a benefit, but the sole proprietor carries the burden of successes and failures of the business alone. This may be a vital disadvantage of owning a sole proprietorship because it is one more source of stress and pressure that a sole proprietor has to carry.

Deciding Between a Sole Proprietorship and an LLC or Corporation

When coming up with which business entity to choose, first and foremost, prioritize your business requirements. Is it an LLC, a corporation, or a sole proprietorship? For a new entrepreneur, like a freelancer who is hunting for a client, starting a sole proprietorship is simple and inexpensive. In the same manner, for a company that is rapidly growing in need of capital, the two options of becoming either a corporation or LLC would be more appropriate.

Consider the different aspects, such as financial and the operational ones, to select the most beneficial option that will be appropriate for your business.

How FastLane Can Help?

FastLane Group makes Hong Kong company registration simple, guiding the client through from beginning to end. We take care of all corporate services like a company secretary, accounting, and audit to respective authorities. In addition, our all-encompassing services cover bank account opening and ongoing compliance, making sure that your company meets all regulatory standards with ease. Contact us now to help you choose the right business structure that works best for you.