Advantages and Disadvantages of Sole Proprietorship: Everything You Need to Know
Small investors like setting up sole proprietorships too, as they are the sole receiver of all the profits from a sole proprietorship. 3 min read
Advantages and Disadvantages of Sole Proprietorship
There are several advantages and disadvantages of sole proprietorship. Entrepreneurs often turn to sole proprietorship to set up a solo business. It’s the quickest and easiest way to set up a legal structure to do business. If you’re starting a solo business, your legal set up will likely be a sole proprietorship, too. It gives you the legal framework for a business owned and run by one person.
Individuals that run sole proprietorships can report business income and expenses on their individual tax returns. Small investors like setting up sole proprietorships too, as they are the sole receiver of all the profits from a sole proprietorship.
But there is risk involved as well. Sole proprietorships offer little protection for the owner in the case of a deal gone wrong. Sole proprietorship can be seen as an extension of the owner, who can be held liable for losses or debts incurred by the sole proprietorship. The owner can also be held responsible for any business violations. The risks are inherent in running a sole proprietorship. But let’s look at the advantages first.
Advantages of a Sole Proprietorship
If you want to run your own business, then a sole proprietorship gives you that luxury of control, effort and rewards in the business structure. For starters, there are no separate business tax returns required. Any income made by sole proprietors from the business is counted as personal income. Owners then pay taxes according to their individual tax rates.
Launching a sole proprietorship gives an owner the ease of business formation. Filing a business name is swift and inexpensive. Check here for your state’s particular rules on forming and filing a sole proprietorship. In general cases, there is an online application available, or the owner must visit a state office and fill out a DBA (Doing Business As) form to operate under a given business name.
The owner can then receive the business name and set up bank accounts and apply for credit cards for the business. Individuals owning sole proprietorships are not required to file annual reports or legal documents as required by some other business structures.
If you want to launch with more protections, you can always look to set up research a limited liability company instead, as this also offers various legal structures for solo entrepreneurs looking to set up a business.
Here are clear advantages for sole proprietors:
- Minimum formation costs
- Less formal business requirements
- No corporate tax payments
- Complete control over a business
- Owner has power over sale or transfer of assets
- No need to wait on a decision from others
An individual with a sole proprietorship can choose to have employees or not. An owner can have a looser structure with a handful of employees in a sole proprietorship. For instance, the owner can pay a higher wage instead of dealing in the complexities of health insurance. Bonuses and incentives are up to the discretion of the owner as well.
While a proprietor can keep all the profits in a sole proprietorship, he also has the option to share the profit with a few employees. A sole proprietor doesn’t have to discuss this with any business partners.
A sole proprietor owner can also choose to stop business operations at any time. The process is easy to do, with a few documents necessary and the timeframe is shortened.
Disadvantages of a Sole Proprietorship
There are also disadvantages for sole proprietors in running their own businesses. These include:
- Sole proprietor is responsible for the business obligations (including any debts).
- Sole proprietor must file any forms needed for the business name and operations.
- Sole proprietor is responsible for all monies and debt for a business, even under a separate marketing name.
- Sole proprietors’ money is generally tied into the business. There usually is no legal separation between personal funds and business funds. This can become a problem if the owner faces legal actions about the business. Personal funds can be at risk for a sole proprietor.
- Pressure and Time - A sole proprietor faces the disadvantage of working too hard on the business. It’s a possibility that his personal life and family life could suffer. Vacation time can be interrupted by word demands.
- A business set up as a sole proprietorship is not taxed, as the profits and losses are assumed by the sole proprietor.
It doesn’t take a lot of time and effort to set up a sole proprietorship in your state. Post your legal need and try searching for a legal pro in UpCounsel’s marketplace for your business setup. Lawyers on the UpCounsel platform have experience setting up sole proprietorships, LLCs, corporations, non-profit organizations, and more! Let them do the work right for you!