What Is a Sole Proprietorship? (With Pros and Cons)

By Indeed Editorial Team

Published 27 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A sole proprietorship is a firm with just one owner. It's the simplest form of an organisation since it's easy to set up and manage, and it has no separate legal existence from the owner. Understanding the process of setting up a sole proprietorship and the benefits and drawbacks associated with this type of business entity is essential if you wish to set up a business. In this article, we discuss what a sole proprietorship is, describe how to create a sole proprietorship and highlight the advantages and disadvantages of this business type.

What is a sole proprietorship?

If you're interested in running a business, you may wonder, "What is a sole proprietorship?" A sole proprietorship is a company that's not separate from its owner, and the business owner charges the gains and losses to their own tax return. This is the simplest type of company and accounts for the majority of the businesses in operation today. The sole proprietorship is not a legal entity, but an individual also called a sole proprietor who operates and takes full responsibility for the business.

Sole proprietorships often operate under the business owner's name or use a fictitious name. Such a business model is extremely popular due to its simplicity and ease of operation. Individuals only require a registered name and local licence to operate as a sole proprietorship. Often companies begin as a sole proprietorship and eventually advance to a more sophisticated business type as the company grows.

How to create a sole proprietorship

Setting up a sole proprietorship is straightforward in Hong Kong. Being one of the freest economies in the world, the process of registering a sole proprietorship is reliable and quick. Here's an overview of the typical steps involved in registering as a sole proprietor:

1. Choose the type of business you wish to start

Several kinds of businesses can benefit from being a sole proprietorship. Determining which type of business you want is the first step to starting a sole proprietorship. Common examples of companies that begin as sole proprietorships include:

  • running a daycare centre

  • offering services as freelance writers and editors

  • providing catering services

  • running a bookkeeping business

  • offering tutoring services

  • running landscaping companies

  • working as a business or financial consultant

  • offering services as housekeepers, petsitters or nannies

  • running a virtual assistant business

  • providing fitness training services

  • offering computer repair services

Related: 9 Skills of an Entrepreneur and How to Develop Them

2. Determine if a sole proprietorship is right for you

After you decide the type of company you want to start, you can then determine if a sole proprietorship is the best option for your company. Weighing the pros and cons of the different business models can help you pick the right model that suits your needs. Common business types include sole proprietorships, partnerships, limited liability companies (LLCs), cooperatives and corporations. Often, small businesses begin as either a limited liability company or a sole proprietorship based on their particular needs.

3. Select an appropriate business name

A business owner can run a sole proprietorship under their own name or use a fictitious name. Here are some factors to consider before choosing a business name:

  • You can register a sole proprietorship with an English name, a Chinese name or a combination of both.

  • If using a Chinese name, you can include English alphabets, but not English words.

  • Avoid using a name that suggests a connection with the Government or any public agencies when no such link exists.

  • Avoid using a name that another company has already trademarked or is offensive to public interests.

4. Register the business

One of the most important steps is registering the business with the Inland Revenue Department's Business Registration Office to obtain a Business Registration Certificate. The certificate also includes the business registration number, which is the sole proprietor's tax filing number. It's essential to register a business within one month from the date of commencement of business. To complete the registration process, here are some important documents to submit:

  • complete application form, including the proposed business name

  • finished and duly signed incorporation structure

  • certified copy of the original identity card for Hong Kong residents

  • copy of the owner's passport or identity card for non-residents

5. File for a business license

After registration, sole proprietors can apply for a business licence to operate legally. For example, you may require a business licence for operating businesses like restaurants, travel agencies, financial services, educational institutes or export businesses. If you plan to run your business from your home, you may also require additional permissions from the concerned authorities.

Related: 7 Tips for Improving Your Budget Management at Work

6. Set up a domain

Several small businesses choose to set up a website for their company. A website can be helpful to draw traffic to your company and attract new customers. Buying a domain is a fairly straightforward process and can be done as soon as you determine your company's name to ensure that no one else purchases a domain with the same name.

7. Open a bank account for your business

The final step for most sole proprietors is to open a corporate bank account for their business with any of the major banks in the city. This ensures that business and personal income and spending are kept separate and protect business cash flow. Sometimes, the banks may need the business owner to be physically present to open the bank account as part of their due diligence process.

8. Fulfil continuous compliance after registration

It's essential for the sole proprietorship to submit their profit tax returns annually. Within 18 months of incorporation, the government sends the first tax file notification to the newly registered sole proprietorship. If the company's gross income doesn't reach $500,000, it's not important to attach financial statements together with your tax returns.

Related: Professional Business Letter Format (with Examples)

Advantages of a sole proprietorship

Choosing to operate a sole proprietorship can have several benefits, especially for small businesses. Here are some advantages of choosing to start a sole proprietorship:

  • Easy to establish: Unlike other businesses, a sole proprietorship is typically inexpensive and easy to start. This can be beneficial if you wish to turn your side hustle into a more lucrative career option or don't have the necessary funds to set up another type of business.

  • Complete control: Individuals who own sole proprietorships are the company's sole owners. This means you have a final say in how it's run and can take the business in any direction you wish to develop.

  • Control over all revenue: Unlike other businesses that may require you to make payouts to investors, lenders and other individuals or organisations, a sole proprietor doesn't have any financial obligations besides those expenses incurred by the owner.

  • Simplified ownership: Sole proprietorship is simple in terms of business structure. A single business owner makes the decisions, takes responsibility and controls all aspects of the business.

  • Less paperwork: A sole proprietorship usually requires lesser documentation and paperwork. With lesser paperwork, you can spend more time developing your unique business strategy.

  • More straightforward tax setup: Another biggest advantage of a sole proprietorship is simpler and straightforward tax requirements compared to other entity types.

Disadvantages of a sole proprietorship

While there are certain advantages associated with sole proprietorship, there are also a few disadvantages to consider when deciding if a sole proprietorship is suitable for you. Here are some drawbacks to keep in mind:

  • Personally liable for lawsuits: Sole proprietors are personally accountable for their company's financial situation, which implies if the company falls into debt and is unable to pay lenders, the lenders can charge lawsuits against the business owner. If the court settles the lawsuits favouring the lenders, the business owner is personally responsible for paying off the debts.

  • Difficulty in raising capital: While other companies can sell a stake in the business to raise money, a sole proprietorship cannot. This can limit a sole proprietor's ability to bring in funds when required.

  • Higher taxes: Business owners who own sole proprietorships are often responsible for paying the income tax and other related taxes for the business' income. This can sometimes be a hefty amount if the sole proprietorship runs successfully.

  • Difficulty in selling off the business: Sole proprietorships are more challenging to sell than a corporation. If the business owner decides to move on from the company, there may be no succession plan or paperwork.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

Explore more articles