What is a Sole Proprietor business?
Sole proprietorship is a form of business entity which is set up solely by one person only. Everything within this kind of entity will be the responsibility of this one owner. For this entity, his liability is unlimited. Unlimited liability means that the owner will be personally liable for the debts owing by his/her Sole Proprietor business.
A further elaboration on the meaning of unlimited liability is this: if the Sole Proprietor business fails or unable to repay its debts, the creditors have the right to sue and obtain a court order to claim the debts owing by the business, against his personal assets. Personal assets mean cash savings, houses, cars and any other “cash-able” items own by him in order to repay debts created by the Sole Proprietorship.
If this is so risky, why still set up this kind of entity?
This form of business is cheap, easy to set up, with minimal documentation and paperwork. There are much fewer guidelines and formalities wherein there is no requirement to appoint auditors, company secretary or tax agents. You do not need to disclose your financial statements to the general public.
When do you want to use this type of business entity?
General recommendation for you to choose this type of business is when:-
- Your risk of business liability is minimal or zero (you have to decide your risk tolerance); AND
- Your business is not making huge profits. This is from the tax planning point of view.
- Setting up business entity, “Partnership Business“