A Sole Proprietorship Business - Pros and Cons

A Sole Proprietorship Business - Pros and Cons

Whether it’s in the US, UK, or any other country in the world, starting or owning a business is a dream come true. Many entrepreneurs ultimately set up their sole proprietorship, an unincorporated company owned and operated by a single person. Sole proprietorship is one of the most common types of business.

 

 

Thus, you need to compare the pros and cons of a sole proprietorship, which will help you in deciding whether this is the best entity type for your business or not.

But before that, learn what a Sole Proprietorship is?

It is a type of business owned by a single person, and that individual is considered the sole owner. In simple words, the business and the owner are treated as a single entity in a sole proprietorship. For example, consultants, direct sellers, graphic designers, freelance writers, landscapers, bookkeepers, local restaurant or store owners, all can be set up with the legal entity of “Sole Proprietor”.

To help make your decision, here we have listed a few pros and cons of running a sole proprietorship.

Advantages of Sole Proprietorship Business

Less paperwork, easy to setup

Setting up a sole proprietorship is the quickest, easiest, and most affordable way to set up your business. In some states, you don’t even need to register if you’re operating under your own name, you can start conducting business right away. Moreover, you don’t need to file the annual statements that are required for corporations, partnerships and LLCs.

You own everything

When you start a business with a sole proprietorship, you own everything and keep all of the business’s profits, including the assets that come from your business. Adversely, you are also responsible for all company debt and liability. Even if you retire or want to pass on your business to your heirs, it would be more convenient as you don’t have to ask your investors, partners or others regarding the transfer of ownership.

You are the decision maker

When you’re a sole proprietorship, you as the owner and manager make all decisions for the business and its future. That means you don’t need to negotiate with the board or coordinate with your partners. Thus, you’ll be able to make decisions quickly and solo according to your choice.

Tax setup is easier

The process is more precise and has fewer requirements for business taxes, especially compared to other entity types. For corporations and limited liability companies, the owner has to apply for the Federal Employer Identification number or FEIN with the IRS, as sole proprietors are not required to file for an FEIN. As sole owner, you even have an option to use your social security number just like you use it for any other financial transaction that requires it. Therefore, as a sole owner, you don’t need to worry about paying taxes separately for your business. Tip: You can complete all your tax filings with the annual 1040 form and Schedule C, Profit or Loss form.

Registration fees are less

When you start a business, your budget might be tight. Most states require LLCs and other larger business entities to register their business with the state before conducting business but not with sole proprietorships. Sole Proprietors don’t have these strict ongoing legal requirements compared to other business structures.

Banking becomes straightforward

One of the essential advantages of a sole proprietorship is simplified banking. Sole Proprietors are the only business entity that doesn’t require a business checking account to operate a company. You can make and accept business payments straight from your personal bank accounts. If you want to separate your business account and personal account, it’s up to you. Regardless of type of bank account you choose, ensure that you maintain it well and keep records clear for both your business and personal spending.

More control

As it is a self-owned and self-operated company, the person operating or owning it has complete control of the business. Moreover, that person will be the boss and sole decision-maker of the company. Many young talents in the market become sole proprietors, are their own boss, and run the company on their own terms.

Disadvantages of Sole Proprietorship Business

More responsibility

When you opt for sole proprietor, you must own and operate your proprietorship all by yourself. There might be a few people who will advise you but not your partners or anyone else. Thus, as you’re running the show, all responsibilities such as making decisions, managing your books, providing the product or service, marketing, legal and handling business taxes will be wholly your responsibility. But if you are not ready to take on all responsibility of being a sole proprietor, consider another structure such as a partnership.

No room for expansion

One of the most significant drawbacks of a sole proprietor is little room for expansion and growth. But yes, if you want to expand your business, get a partner or find investors, form a corporation or find a board of directors, you will also need to change your business structure and give up full control.

You are liable

As a sole proprietorship, you will face certain financial obligations. For example, you own a building for your business but are not able to make the mortgage payments on time. In this case, you’ll be responsible for all your business debts. So, if you don’t want that, you can set up a partnership to spread financial risk among multiple partners. Some owners also decided to set up a separate corporation or LLC that is itself, fiscally responsible. Doing this might reduce your financial risks but might well create other challenges.

Harder to separate business and personal finance

Many owners prefer to keep their business and personal lives separate, unfortunately, that may not be easy with a sole proprietorship. The majority of the time, owners will find their professional and personal lives becoming entangled. Even as an owner, you might need to use your personal assets, such as your home or vehicle, for your business.

How to know whether a sole proprietorship is suitable for you or not?

Before you start your sole proprietorship business, first ask yourself these questions to ensure whether it’s the right fit for your venture:

  • Are you capable enough to make critical business decisions?
  • Can you deal with the stress of sole proprietorship?
  • Are you comfortable being personally liable?
  • Will you be able to handle all responsibilities for your business?

After all, if you are ready to start the sole proprietorship business, here’s what to do…

As you know the pros and cons of sole proprietorship if you’re ready to make the leap and become the sole owner of your business, follow the below steps.

  • Step 1: Get a business name
  • Step 2: Open a business name bank account
  • Step 3: Get your business license
  • Step 4: Apply for special-state, city or county permits, if required any
  • Step 5: Obtain other professional licenses related to your industry

Bottom Line

When it comes to the pros and cons of a sole proprietorship, many of the best advantages can also have opposing drawbacks, it all depends on what will work for you and your business. However, before making a final decision, it’s worth considering what the other entity types have to offer, including consulting legal and tax experts for professional advice.