Sole Proprietor v/s Company

Sole Proprietorship:

Meaning
Sole proprietorship is a business name owned by any individual. When the ownership and management of business are in control of one individual, it is known as sole proprietorship. Since the business is actually owned by a single individual, all rights, duties and liabilities are fastened on the same individual only. Since it is owned and managed by one single individual, often the size of business remains small.
Characteristics:

1. Ownership :

The business enterprise is owned by one single individual and the individual has legal title to the assets and properties of the business. The entire profit arising out of business goes to the sole proprietor. Similarly, he also bears the entire risk or loss of the firm.

2. Management :

The owner of the enterprise is manager of the business. He has got absolute right to plan for the business and execute them without any interference from anywhere. He is the sole decision maker.

3. Source of Capital:

The entire capital of the business is provided by the owner. In addition to his own capital he may raise more funds from outside through borrowings and through loans from banks or other financial institutions. The proprietor shall be liable for all civil and criminal liabilities arising out of the business and conduct of the firm.

4. Legal Status:

The proprietor and the business enterprise are one and the same in the eyes of law. There is no difference between the business assets and private assets of the sole proprietor. The business of the firm ceases to exist in the absence of the owner (death or any other mishap).

5. Liability:

The liability of the sole proprietor is unlimited. This means that, in case the sole proprietor fails to pay for the business obligations and debts arising out of business activities, his personal property can be used to meet those liabilities.

6. Stability:

The stability and continuity of the firm depend upon the capacity, competence and the life span of the proprietor.

7. Legal Formalities:

In the setting up, functioning and dissolution of a sole proprietorship business no legal formalities are necessary. However, a few legal restrictions may be there in setting up a particular type of business.
Advantages of Sole Proprietorship:

1. Easy Formation:

The biggest advantage of a sole tradership business is its easy formation. Anybody wishing to start such a business can do so in many cases without any legal formalities.

2. Better Control:

The owner has full control over his business. He plans, organises, co-ordinates the various activities. Since he has all authority, there is always effective control.

3. Prompt Decision Making:

As the sole trader takes all the decisions himself the decision making becomes quick, which enables the owner to take care of available opportunities immediately and provide immediate solutions to problems.

4. Flexibility in Operations:

One man ownership and control makes it possible for change in operations to be brought about as and when necessary.

5. Retention of Business Secrets:

Another important advantage of a sole proprietorship business is that the owner is in a position to maintain absolute secrecy regarding his business activities.

6. Direct Motivation:

The owner is directly motivated to put his best efforts as he alone is the beneficiary of the profits earned.

7. Personal Attention to Consumer Needs:

In a sole tradership business, one generally finds the proprietor taking personal care of consumer needs as he normally functions within a small geographical area.

8. Creation of Employment:

A sole tradership business facilitates self-employment and also employment for many others. It promotes entrepreneurial skill among the individuals.

1. Equitable Distribution of Wealth:

A sole proprietorship business is generally a small scale business. Hence there is opportunity for many individuals to own and manage small business units. This enables widespread dispersion of economic wealth and diffuses concentration of business in the hands of a few.
Disadvantages of Sole Proprietorship:

1. Unlimited Liability:

In sole proprietorship, the liability of business is recovered from the personal assets of the owner. It restricts the sole trader to take more risk and increases the volume of his business.

2. Limited Financial Resources:

The ability to raise and borrow money by one individual is always limited. The inadequacy of finance is a major handicap for the growth of sole proprietorship.

3. Limited Capacity of Individual:

An individual has limited knowledge and skill. Thus his capacity to undertake responsibilities, his capacity to manage, to take decisions and to bear the risks of business are also limited.

4. Uncertainty of duration:

The existence of a sole tradership business is linked with the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is, therefore, uncertain.

5. Legal Liability:

The legal liability is always fastened against the proprietor.  The proprietor has to attend each and every case personally and is required to be present before court on behalf of his firm.

6. No delegation:

The proprietor cannot delegate his responsibilities regarding management of finance and affairs of the firm. The Firm cannot appoint a representative on his behalf to do the acts of the firm.

7. Succession:

Successors of the proprietor inherit all rights and liabilities of the firm. They are bound to pay all debts of the proprietor as well as of the firm.
Suitability of Sole Proprietorship:

Sole proprietorship business is suitable where the market is limited, localised and where customers give importance to personal attention. This form of organisation is suitable where the nature of business is simple and requires quick decision. For business where capital required is small and risk involvement is not heavy, this type of firm is suitable. It is also considered suitable for the production of goods which involve manual skill etc.
Company

Meaning:

A Company is voluntary association of persons to carry on business.. It is an association of persons who generally contribute money for some common purpose. The money so contributed is the capital of the company. The persons who contribute capital are its members (Directors, minimum 2). The proportion of capital to which each member is entitled is called his share, therefore members of a company are known as shareholders and the capital of the company is known as share capital. The total share capital is divided into a number of units known as ‘shares’.
The affairs of the companies are governed by the Indian Companies Act, 1956. The Act defines a company as an artificial person created by law, having separate entity, with perpetual succession and a common seal.
Characteristics:

1. Artificial Person:

A Company is an artificial person in the sense that it is created by law and does not possess physical attributes of a natural person. However, it has a legal status.

2. Separate Legal Entity:

Being an artificial person, a company has an existence independent of its members. It can own property, enter into contract and conduct any lawful business in its own name. It can sue and can be sued in the court of law. A shareholder cannot be held responsible for the acts of the company.

3. Common Seal:

Every company has a common seal by which it is represented while dealing with outsiders. Any document with the common seal and duly signed by an officer of the company is binding on the company.

4. Perpetual Existence:

A company once formed continues to exist as long as it fulfils the requirements of law. It is not affected by the death, lunacy, insolvency or retirement of any of its members.

5. Limited Liability:

The liability of a member of a Company is limited by guarantee or the shares he owns. In other words, in case of payment of debts by the company, a shareholder is held liable only to the extent of his share.

6. Transferability of Shares:

The members of a company are free to transfer the shares held by them to anyone else.

7. Formation:

A company comes into existence only when it has been registered after completing the formalities prescribed under the Indian Companies Act 1956. A company is formed by the initiative of a group of persons known as promoters.

8. Membership:

A company having a minimum membership of two persons and maximum fifty is known as a Private Limited Company. But in case of a Public Limited Company, the minimum is seven and the maximum membership is unlimited.

9. Management:

Companies have democratic management and control. Even though the shareholders are the owners of the company, all of the them cannot participate in the management process. The company is managed by the elected representatives of shareholders known as Directors.

10. Capital:

A Company generally raises a large amount of capital through issue of shares.
Advantages of a Company:

1. Limited Liability:

In a Company the liability of its members is limited to the extent of shares held by them. This attracts a large number of small investors to invest in the company. It helps the company to raise huge capital. Because of limited liability, a company is also able to take larger risks.

2. Continuity of existence:

A company is an artificial person created by law and possesses independent legal status. It is not affected by the death, insolvency etc. of its members. Thus it has a perpetual existence. The company can form its sole proprietorship firm, partnership firm or become member of another company.

3. Benefits of large scale operation:

It is only the company form of organisation which can provide capital for large scale operations. It results in large scale production consequently leading to increase in efficiency and reduction in the cost of operation. It further opens the scope for expansion.

4. Professional Management:

Companies, because of complex nature of activities and operations and large volume of business, require professional managers at every level of organisation. And because of their financial strength they can afford to appoint such managers. This leads to efficiency.

5. Social Benefit:

A company offers employment to a large number of people. It facilitates promotion of various ancillary industries, trade and auxiliaries to trade. Sometimes it also donates money for education, health, community service and renders help to charitable and social institutions.

6. Research and Development:

A company generally invests a lot of money on research and development for improved processes of production, designing and innovating new products, improving quality of product, new ways of training its staff, etc.

7. Delegation:

The Company can authorize any person to do acts on behalf of the company and in this way the company can be present at many locations at single point of time. The company can authorize the representative to do financial acts and to appear before legal forums.
Disadvantages of a Company:

1. Formation is not easy:

The formation of a company involves compliance with a number of legal formalities under the companies Act and compliance with several other Laws.

2. Control by a Group:

Companies are controlled by a group of persons known as the Board of Directors. This may be due to lack of interest on the part of the shareholders who are widely dispersed; ignorance, indifference and lack of proper and timely information. Thus, the democratic virtues of a company do not really exist in practice.

3. Speculation and Manipulation:

The shares of a company are purchased and sold in the stock exchanges. The value or price of a share is determined in terms of the dividend expected and the reputation of the company. These can be manipulated. Besides there is excessive speculation which is regarded as a social evil.

4. Excessive government control:

A company is expected to comply with the provisions of several Acts. Non-compliance of these invites heavy penalty. This affects the smooth functioning of the companies.

5. Delay in Policy Decisions:

A company has to fulfill certain procedural formalities before making a policy decision. These formalities are time consuming and, therefore, policy decisions may be delayed.

6. Social abuses:

A company is a large scale business organisation having huge resources. This provides a lot of power to them.

Suitability of a Company:

A company is suitable where the volume of business is quite large, the area of operation is widespread, the risk involved is heavy and there is a need for huge financial resources and manpower. It is also preferred when there is need for professional management and flexibility of operations. In certain businesses like banking and insurance, business can only be undertaken by companies.
Edge of Company over Sole proprietorship FIRM:

Firm	Company
Firm is a business name to an individual and individual is liable for acts and liabilities of the firm.	Company is an independent identity and Directors are only managers of the company. Directors are not liable for the losses of the Company and they are only liable for their acts done in personal capacity.
Reputation of a Firm is known from personal reputation of the proprietor and is generally not recognized as profound business entity.	Company is a statutory form of business organization and its affairs are managed as per Companies Act, 1956.
Firm is barred from bidding in many contracts and business operations as its certainty and management is limited to the proprietor only	Company is most welcome business organization for tenders and business operations as its existence is certain. The business of a company is not limited to an individual and any person can be authorized by the company to perform on behalf of the company.
Proprietor of firm is held liable for all civil and criminal acts of the firm.	Company, not directors are liable for civil liabilities against the company. Directors are liable for acts done in their personal capacity.
Proprietor cannot delegate its responsibilities to any person and in this way has only one face.	The Company can delegate the responsibility to any person for discharge of duties of the organization and hence is multi faced.
In view of foreign business collaborations the firm is same as individual	The company is only statutory body in eyes of international Laws.
Firm terminates at death of the proprietor hence has limited existence	Company does not seized to exist at death of any member hence has a perpetual existence.

Requirements to form a company:

1. Minimum two persons (Directors)
2. Identity and address proof of directors
3. PAN card of Directors
4. Two passport size photographs of directors