What is a Sole Proprietorship?

A sole proprietorship has been labeled by many as the most basic of all the business structures. As far as start-up costs are concerned they are virtually non-existent with a sole proprietorship. All that you need are the funds that your business itself needs to get started. As most new businesses do not have access to a steady stream of capital, becoming a sole proprietorship is a great starter business type even for those with aspirations of having their companies evolve into something bigger and more corporate.

With all of the hype surrounding the ease of establishing the sole proprietorship, it is important to keep in mind that just because this business structure may be a simple way to start up your company, it does not mean that it is the best way for you, your company, and your current goals and situations. You must learn the pros and cons of a doing business as sole proprietorship and make the decision for yourself as to whether or not a sole proprietorship is right for you.

A sole proprietorship is a business without the status of either corporation or limited liability. A sole proprietor is someone who owns an unincorporated business by himself or herself. In other words, the individual business owner represents the company legally and fully. The company and the owner do not exist separately in the eyes of the law. The business owner can do business under the name of the business rather than using his or her own name (such as when a business account is opened with a banking institution), but the responsibilities belong solely to the owner. Common examples of working sole proprietorships include part-time businesses, direct sellers, new start-ups, contractors, and consultants.

Advantages of a Sole Proprietorship

Most entrepreneurs are interested in choosing the sole proprietorship as their business structure because of the ease that it provides to them as far as the actual establishment of the business is concerned. The sole proprietorship's legal structure can't be beat mainly because no additional work must be done in order to start the business. Even dissolving the business is simple because of the lack of legal formalities that are required. Because a sole proprietorship means that the business is not separate from the business owner, what the business makes, the owner makes and consequently anything that the business looses are reflected in personal losses for the owner. A sole proprietorship provides an individual with the ultimate control that they may be looking for when they go into business for themselves. There are generally no partners (with the exception of a spouse who might work with you in the sole proprietorship) to answer to and therefore you truly can be the one with the power to make all of the decisions. Now, making the right decisions and becoming successful are entirely up to you. Below you will find a list of the most common advantages of a sole proprietorship. If these advantages provide you and your business with the options that you feel are most valuable, then a sole proprietorship may just be right for you.

• A sole proprietorship often has the advantage of the least government regulations. This is most evident in examples of taxation but there are also fewer legislative requirements. Generally, it is the individual state wherein the sole proprietorship will be registered that can provide the specific legal information that you will need to have before starting your business.
• Quicker tax preparation - As a sole proprietor, filing your taxes is generally easier than it would be if you were filing taxes for a corporation. The main tax return that you will need to file for your business will be the same as your individual tax return. What you do is add your business losses (costs of doing business) and your profits for the year that you are filing the taxes for. Your individual and business incomes are considered the same and therefore only self-employed taxes will apply. A sole proprietorship need not worry about double taxation like a corporate entity would have to.
• Lower costs, less capital needed - A sole proprietorship is the least expensive type of business structure to establish. There is no need for a lawyer or for an excessive amount of money to be set aside in order to pay a number of fees. Corporations are much more expensive to start up.
• Simple bookkeeping - Not all people who want to start their own business will have training in accounting. Yet, if you want to start a corporation you will need to know a great deal about money handling. A sole proprietorship, on the other hand, does not require any set payroll system or any other financial business structure. As far as finances go, many sole proprietorships simply set up a separate account at their banking institution for their business funds and record all applicable business expenses in the management of that account.
• Complete control of your business - As a sole proprietor you answer to no one but yourself. You have complete control over the decisions that you make for your business (of course while staying within the parameters of the law). There are no shareholders or board of directors to report to.
• Your income - Sole proprietors receive all of the income that their business generates and can choose to use that income any way that they wish. As with all flow-through entities, all of the profits and losses from the business go directly to the owner of the sole proprietorship. Many sole proprietorship owners find it prudent to reserve a portion of their business income for the paying of taxes and for re-investing into the business.
• Dissolving the business - In the case that you wish to dissolve the business, the process of doing so is very simple, especially then compared to the steps that a corporation must go through in order to legally dissolve.
• Access to health care - In the United States a sole proprietorship has the option of buying health care for self-employed persons, such as a Health Savings Account.

Disadvantages of a Sole Proprietorship

Even success has its disadvantages when your business is structured as a sole proprietorship. As a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor may end up having to form an LLC (limited liability company), a structure that has very different tax implications and obviously a different operational style.

Just as with any business structure, there are disadvantages to a sole proprietorship that you must consider. Naturally, these disadvantages may be the factors that lead you to decide that a sole proprietorship is not the right choice for you. On the same hand, it is important to realize that not all of the advantages that you just read about will be applicable to your situation.

• Personal liability - Personal liability is perhaps the largest disadvantage to becoming a sole proprietorship. Your small business, when in the form of a sole proprietorship, is personally liable for all debts and actions of the company. Unlike a corporation or LLC, your business doesn't exist as a separate legal entity from yourself as the owner. All your personal wealth and assets are linked to the business. This means even the assets that you own that have nothing to do with your business operations could be at risk if you incur debts as a sole proprietor that you are unable to pay back with the profits of the company. If you operate in a higher risk business where your benefits may not consistently exceed your costs, you may be better off with the personal liability protection that a corporate structure can provide.
• Lack of control - While there are advantages to not having to comply with a great deal of rules, there is also something to be said for structure and the disadvantage that can manifest itself when there are no set rules or procedures by which the company is operated. In reality, the lack of accounting controls and bookkeeping skills can result in the demise of your small business. You must take the initiative to set up the proper financial statements for your sole propriety which may be difficult for some when there are no government entities or required forms put in place to help guide you through the process.
• Your own boss - In a sole proprietorship you may be excited to not have to answer to anyone else, but it can be challenging to go at business ownership all alone. There is always something that can be said for the advice and contributions of another's way of thinking. In a sole proprietorship you are on your own and it can get lonely even when you are at the top of your business. Additionally, if you were to ever take on additional employees, they may want the opportunity to also have some ownership of the company, a possibility that is none existent with a sole proprietorship.
• Capital - Every company needs money to get things going. While you may have some funds saved up, if you are to ever need more it is very difficult for an owner of a sole proprietorship to find capital funding. Investors are more likely to see corporations as a smart investment because the risks are lower. You may loose out on some valuable business opportunities because of your sole proprietorship business structure.