As I told you in an earlier article which summarized business ownership structures, a sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’ debts, losses and liabilities.
Is this structure right for your business? Here are the main pros and cons of doing business as a sole proprietorship.
Advantages of a Sole Proprietorship
- Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
- Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
- Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. Your business income is reported on Schedule C (Profit Or Loss From Business) of your individual income tax return. The tax rates are the lowest of the business structures.
Disadvantages of a Sole Proprietorship
- Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities that results from the actions of your employees.
- Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won’t often invest. Banks are also hesitant to lend to a sole proprietorship because of their concern that the debt won’t be paid if the business fails.
Some businesses start as sole proprietorships because of the simplicity but evolve into another structure as they become successful.
**This article is designed to provide helpful information that can be read within 2 minutes. It is neither a full explanation of this subject nor legal advice. To learn more, and to get legal advice on which you can rely, contact me or another lawyer.