A proprietor is a person who is the legal owner of a business. The business is usually an unincorporated entity or a sole proprietorship.
The term “Proprietor” has its origin from the concept of Sole Proprietorship, a type of business where the model hinges on a single person owning an entire business and paying a personal income tax on income earned from the business.
The term can also be used to refer to exclusive legal title or rights over intangible goods or services. For instance, Microsoft has proprietary rights over the Microsoft Office software since the product was designed, developed, and patented by Microsoft technologies. If you want to use the software, you will have to buy usage rights from Microsoft. Manufacturing processes and technology are also considered proprietary for an individual or business if they have been designed and developed by them.
- A sole proprietorship is the simplest form of business to establish or dissolve since it has very little or no government regulation.
- As the only owner of the business, a proprietor has full freedom and authority to decide on all business decisions without the interference of third parties, such as shareholders or board of directors.
- From an accounting and tax perspective, the proprietor is essentially an individual who owns a business. This makes him eligible to file taxes as an individual but as a person who owns a business, he enjoys the advantage of deducting his business expenses from his income. So whether it is fuel expenses, advertising, or even a home office expense, the proprietor can deduct all such expenses from his income. Moreover, a proprietor can even claim business losses as deductibles from his personal income.
- Legally speaking, a proprietor is indistinguishable from his business and that makes him personally liable for all liabilities and debts incurred in the business. If the business runs into a loss and is unable to repay debts, the creditors of the business can claim the personal assets of the proprietor in lieu of his business debts. In other words, the concept of a ‘corporate veil’ does not apply to a proprietor.
- Also unlike a limited liability business, a proprietor might find it difficult to obtain capital funding through established channels since the business worth is tied to the proprietor himself.
- Similarly, it is difficult for a proprietor to sell or transfer his business to a third party since most of the time the business reputation and value are tied to the proprietor’s goodwill.
After having been in the clothing and apparel industry for over two decades, Jack decided to venture out and start a new apparel outlet, Jack’s Apparel, in his home town. He reasoned that his children (two sons and a daughter) can take over Jack’s Apparel after him.
As the only owner of the business, Jack is not legally required to incorporate or otherwise formalize the business. He is considered as the sole proprietor of the business. Jack and Jack’s Apparel are one and the same in the eyes of law. All income from the business goes directly to Jack. Similarly, he is responsible for all the debts and liabilities of Jack’s Apparel.
Ten years into the business, Jack felt it was time to hand over the reins to his children. On consulting with his attorney, he realized that to divide the business equally amongst the three children, Jack’s Apparel could no longer remain a sole proprietorship. Instead, Jack would need to form a private company and divide the shares among his children so that all of them could do their part and run the business together.
The additional advantage was that, if at all the business ran into losses, the personal assets of the three children would still be protected due to the concept of limited liability. The presence of the corporate veil meant that, in case of business losses, the creditors of the business (Jack’s Apparel) could only take over the assets of the company and not the assets of Jack or his children.
So, Jack converted his sole proprietorship business of Jack’s Apparel into a private limited company named Jack’s Apparel Pvt. Limited and split the shares equally among himself and his three children.
It is a well-established fact that most successful businesses were started by a single owner. Well-known retailers like J.C. Penney, Sears, and even hotel chains like J. W. Marriott were all started by a sole proprietor. Only when these businesses started growing did they get converted into limited liability companies or corporations.
Any individual can start a business as a sole proprietor. It is that simple! It is the most popular form of business ownership across the world. From freelancers to retailers, creative artists to techies, anyone can become a proprietor of a business or work of art or an invention.
To sum up:
- A proprietor is a person who is the legal owner of a business.
- The term “proprietary” refers to exclusive legal title or rights over intangible goods or services. This includes processes, technology, patents, copyrights, and software.
- It is very simple for a proprietor to establish or otherwise dissolve his business due to minimal governmental regulations.
- A proprietor enjoys full ownership of the business, absolute control over decision making, flexibility to run the business on his terms, and tax advantages similar to an individual
- The proprietor does not enjoy the backing of the concept of ‘corporate veil’. This makes him fully liable for the debts of his business. Creditors have legal rights to attach his personal assets in exchange for the company’s debts.
- A proprietor might find it tough to raise capital funding for his business or sell or otherwise transfer his business to a third party.