When starting out in business, many choose to be a sole proprietor. The typical reason for starting out this way is because this is the simplest and in some ways the easiest model to use. With over 70% of small businesses falling under this model, sole proprietorships are also the most popular option. But is a sole proprietorship really right for you? There are several advantages and disadvantages worth your consideration, so to help you decide on the most profitable option for your business, consider the following:
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.
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 and all 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 personal 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.
Many businesses start off as a sole proprietorship and incorporate the business later on; other start-ups find it more 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 http://www.sba.gov/community/blogs/sole-proprietorship%E2%80%94-popular-business-structure-right-you. 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!
