Cost Advantage of Sole Proprietorship
Advantages of Sole Proprietorship over Limited Liability Companies.
When it comes to the issue of legal structure of a business, sole proprietorship seems to be the most popular. This may be due to its simplicity in formation.
Just of recent, I had somebody discussing with me about his intention to start his own new business. He had a business idea and he is convinced that the idea is feasible. Truly, when I looked into his projections coupled with the results of the market research he carried out about this business idea, I was also convinced that the business idea would work. Then the issue of capital now came up. Although the business idea is the type that does not require huge capital to start, at least, he needed some funds for the registration of the business and other initial expenses. He was now seeking advice on which legal structure that would be suitable for his business and his situation.
He was aware that he could register the business either as a sole proprietorship, partnership or a limited liability company. He had some of his friends who had already registered their businesses as a limited liability company. He was considering registering his own business as a sole proprietorship but he wanted to know if there is any cost advantage he could enjoy if he should go this way. I was curious when he mentioned ‘cost advantage’. I now asked, “why emphasis on cost?” That was when he opened up to me that one of his friends had already told him that sole proprietorship is cheaper. So, his coming to me was just to gather more information about the cost effectiveness of sole proprietorship before he made his final decision. So, in this article, I like to share the points I discussed with him. I consider this as a good opportunity for me to educate the readers of my previous posts on various business ideas I have discussed so far. If you have been following my articles, I usually reinforce the need to register a business. Here, you will find information why you may consider sole proprietorship when deciding on the legal structure of your business.
Read Also: Factors Affecting Choice of Legal Structure of Your Business
Below are the reasons sole proprietorship is cheaper than limited liability companies.
Registration fee
When you want to register your business with Corporate Affairs Commission, you need to pay registration fee. Besides, there are other fees that are incidental to the type of legal structure you choose for your business. These include fees for the notice of change in business name, change in business address, changes in sole proprietorship or particulars of directors, filing of returns etc. When you put all the costs together for sole proprietorship registration and compare with limited liability companies, you will discover that the registration costs for sole proprietorship is cheaper. Apart from this, you can register sole proprietorship by yourself without engaging any attorney. For the registration of a limited liability company, you need an accredited agent, who may be a lawyer or an accountant to handle it for you. Of course, this will come at an additional cost as the agent will like to charge you for his service.
Professional fee
Every limited liability company is expected to appoint a Secretary and an Auditor according to the provisions of the Company Allied Matters Act. Limited liability companies are expected to prepare audited accounts at the end of their financial year. These provisions do not affect sole proprietorship. Sole proprietorship is not under any obligation to hire a Secretary or an Auditor neither is it mandated to prepare audited financial statements at the end of the year. Therefore, sole proprietorship as a legal structure will save you costs in these areas.
Also Read: How to Generate Name for Business with Ease
Taxation
Another area sole proprietorship enjoy cost advantage is in the area of taxation. All limited liability companies are expected to pay income tax and education tax. Company income tax rate in Nigeria is thirty per cent while education tax is two per cent. The assessable profit on which tax computation is based is arrived at after some adjustments have been made to the accounting profits. These taxes are governed by Company Income Tax Act. This Act does not cover sole proprietorship. Therefore, the profit of a sole proprietorship is not subject to company income tax. Instead, the owner of the business is taxed based on the income accrued to him from the business under Personal Income Tax Act. Nigeria operates graduated personal income tax rates. On average, personal income tax stands at an average of twenty four per cent. This means that sole proprietors suffer less tax on its profits. Besides, sole proprietors can defer tax payments by ploughing back profits to the business. Sole proprietorship profits are not taxed until the profits are withdrawn by the owner. So, this is a cheap funds which sole proprietorship can easily use for the expansion of business.