Sole Proprietorship Advantages

There are several sole proprietorship advantages, but there can also be disadvantages, depending on the needs of your business.

A sole proprietorship is the simplest business formation you can undertake. It has no complicated business filing requirements, like the formation of a corporation would. The business income and expenses of a sole proprietorship can be filed on the owner's personal tax returns. Not only is a sole proprietorship easy to set up, but the owner is also the sole beneficiary of all profits gained in the business.

However, the greatest risk of owning a sole proprietorship is the fact that there is no legal separation of owner and business. They are seen as one entity. This makes the owner personally liable for any and all debts the business incurs, and creditors can come after the owner's personal accounts and assets.

Any violation made by the employees of the sole proprietorship or by the business, the owner is personally held responsible. The owner is the business. The business is the owner.

Due to this potentially great risk, many entrepreneurs may choose to start an S-Corp. or an LLC instead. An LLC or S-Corp, provides the owner with limited personal liability, as they allow for the business to be seen as a separate entity or operating body from the owner.

Some Sole Proprietorship Advantages

There are still many benefits to starting a Sole Proprietorship.

Some of the most noted sole proprietorship advantages include:

  • A sole proprietor has sole control over business decisions and direction

  • The sole proprietor, alone, can decide to sell or transfer the business

  • Corporate taxes are excluded

  • Taxes are filed with the sole proprietor owner's personal tax return

  • Inexpensive to start

  • Fewer official business requirements

  • Employer is not required to obtain an Employer Identification Number (EIN), as long as the owner does not hire employees or set up retirement plans

  • Sole Proprietorships are easily sold, as the sole owner has control of the whole business.

  • Individual owners of a sole proprietorship do not have to annually file legal documents and reports

Sole Proprietorship Ease of Formation

As stated, a sole proprietorship is the simplest business structure to get set-up and running. Even if choosing to file your DBA (Do Business As) or business name, it is still very little paperwork involved.

Documents that may be needed for sole proprietorship formation:

  • DBA Filing

  • business license

Here are some simple steps you may have to take to set up your business name:

  • Some allow for this to be done online, but in some instances you may have to go down to your courthouse and complete and fictitious name or DBA form.

  • When the paperwork is submitted a slight fee may be required

  • You will be issued a certificate with your business name

  • To apply for credit cards for your business or to open bank accounts, you will need this certificate

Some Sole Proprietorship Disadvantages

Just as with any business structure a sole proprietorship also comes with some disadvantages. What you think of these cons depends on the needs of your business.

Some sole proprietorship disadvantages:

  • The owner is personally held liable for and business obligations and debts and creditors can come after the owner's personal assets (houses, cars, bank accounts, etc.).

  • The owner also has unlimited liability for any damages or losses employees may cause.

  • The owner has the challenge and responsibility of all business decisions.

  • It is hard to get financial investors for sole proprietorship

  • Even if the owner takes the steps to file a DBA (Doing Business As) name, the business is still not an independent entity. The owner is still the business and owner still has unlimited liability.

  • Sole Proprietors usually have to finance their own business. This is often done through personal assets and loans.

Due to some of these disadvantages, some Sole Proprietors will decide to incorporate when the business grows. Other owners keep their sole proprietorship structure for many years or for the duration of the business.

The most important thing you can remember about a Sole Proprietorship is that there is legally no separation of owner and business. Develop out a plan for your business and determine if forming a Sole Proprietorship works for you.

If you need help with setting up a Sole Proprietorship or deciding if it's a good fit for your business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.