Are you thinking of starting a business? Are you unsure if a sole proprietorship is right for you? A proprietorship is the simplest and in some ways the easiest model to use. This type is also the most popular with over 70% of small companies falling under this business formation. There are both advantages and disadvantages to consider. Before you decide on the most profitable option for your business, consider the following:
Disadvantages:
- Risk/Liability: Since the sole proprietor is tied to the business, there is no separation between personal and business liabilities. The owner is personally responsible for any debts, losses, or obligations of the business, even if incurred by employees of the business. A lawsuit or other calamity against the business would not only cripple the business, but the owner as well.
- Responsibility: The advantage of having complete control over the business comes with this disadvantage: with great power comes great responsibility.
- Lack of Capital: Many investors will frequently pass up sole proprietors as a sound investment, and banks often only lend to incorporated businesses. Sole proprietors usually must rely on their funds and assets to get their business off the ground.
- Perceptions: Potential clients may view incorporated businesses as more reliable or trustworthy than sole proprietorships. Professionalism must be a high priority for sole proprietors to counter this perception.
Advantages:
- Control: A sole proprietor is in control of his/her business. The monetary decisions and business transactions all rest on the owner, without the need to report to partners, board members, or shareholders. If you want to sell, transfer, or make strategic decisions, it’s all on you.
- Ease: Sole proprietorships are the easiest type of business to set up. Minimal legal costs are required, and they also involve significantly less paperwork and formalities than other models.
- Lessened Tax Burden: Sole proprietors are tied to their business. Any business income is reported on the owner’s personal income tax return, without additional business taxes.
Keep in mind you can start off as a sole proprietorship and incorporate the business later on, but you may find it advantageous to use a different model (LLCs and Partnerships are usually the next choice). Taxes can be a big factor in selecting the right business model, as I discussed in a prior post, Tax-Friendly Company Structures.
For more information on sole proprietorships, see sba.gov. If you are in need of legal advice in regard to this topic, call our office and we’ll be happy to refer you to an expert we trust!
