Sole proprietorship, partnership, limited liability company, corporation: these are your options when choosing a structure for your business.
For starters, choosing the right structure for your new business is super important. The right structure will save you money, improve your operational efficiency, and limit your personal liability.
With this in mind, it’s not surprising that you’re asking whether you should start a sole proprietorship. Every structure has its advantages and disadvantages.
In this article, we’re focusing on the pros and cons of sole proprietorship. Continue reading to learn more about this ultra-common business structure.
Sole Proprietorships Are Super Easy to Create
Are you looking to start a business as soon as possible without spending a lot of money on registration?
If yes, a sole proprietorship is the right business to start.
This is the simplest structure, and forming the business is easy. All you to do is find a business name and register it with the relevant department in your state. There’s no complicated paperwork, like a memorandum of understanding or article of incorporation, needed to set up a sole proprietorship.
Business name, address, and a couple of bucks for registration fees are all you need to get started.
You Have Complete Control
In business, you want to have 100 percent control, and that’s exactly what you get with a sole proprietorship. You’re the sole owner, which means you can make decisions without consulting anybody.
For example, if you want to locate the business in a certain neighborhood, nobody will stop you from doing so, as long as you can secure the appropriate business permits and/or licenses.
However, keep in mind that having complete control of your business isn’t always beneficial. Without somebody to check your decisions, it’s easy to make choices that can hurt your business.
Less Government Control
As an entrepreneur, you already know that government regulations can be a barrier to entry for businesses. It’s never a good thing when you have to overcome several regulatory hurdles in order to secure a permit or license to operate.
Yet, that’s what you’ll encounter if you choose business structures such as LLC and corporation.
The good news is there’s minimal government control when you’re setting up and running a sole proprietorship. Unless you’re setting up something like a food service facility or other business in a highly-regulated industry, there are literally no regulations that will bar you from starting up.
Even when it comes to taxation, you won’t file income taxes for the business. Since you’re the business, all the profits you earn from the business are to be reported on your individual taxes.
There’s no requirement to hold annual meetings or keep corporate records.
Easy to Terminate a Sole Proprietorship
When you start a business, you certainly hope to grow it into a big company; one that will last several generations.
You can pull this off, but it’s possible that you might need to fold up the company and move on. Maybe it’s no longer profitable or you’re no longer passionate about entrepreneurship.
When that’s the case, you want to be able to close the shop without consulting anyone or following any specific procedure. With a sole proprietorship, you can do this at any time. Just close the shop and that’s it.
With some structure, though, it’s hard to close down the business and, in some cases, impossible. With a corporation, for instance, you can’t close it. The only thing you can do is exit the business by selling your shares. Corporations don’t die unless they file for bankruptcy.
A Sole Proprietorship Exposes You to Unlimited Liability
You have been enjoying the befits of a sole proprietorship, now it’s time to get the other side of the coin.
As a sole proprietor, you have unlimited liability. The liabilities of your business are also your personal liabilities.
For example, if you take out a business loan and secure it against your house, the lender can come for the property if you default on the loan. With other structures, such as LLC and corporation, you have limited liability, unless you used personal assets to guarantee the business loan.
Unlimited liability means anyone can sue you for whatever reason. For example, if your employee gets injured on the job, they can sue you personally for compensation.
To prevent this, it’s advisable to choose a structure that reduces your liability. If you don’t want to do that or are not ready, you can purchase sole proprietor workers comp insurance. With this coverage, you can rest easy knowing your coverage provider will compensate your employees who get injured on the job.
Less Credibility
In business, you need to start out with as much credibility as possible. Otherwise, you’ll find a hard time convincing people to trust your business or products.
A sole proprietorship does little to give your business the credibility it needs. Since this structure doesn’t result in the creation of a legal entity, most people are hesitant to trust a sole proprietorship.
If you want credibility, try an LLC or corporation.
Lack of Clear Business Continuity
Without a clear business continuity plan, a sole proprietorship can easily die with the death, incapacitation, or incarceration of the owner.
Understand the Pros and Cons of Sole Proprietorship
A sole proprietorship is the simplest form of business, it’s easy to set up, and offers great flexibility. On the downside, the owner assumes unlimited liability for the actions of the business, offers less credibility, and business continuity isn’t guaranteed.
Now that you know the pros and cons of sole proprietorship, do you want to start a sole proprietorship? It’s your choice!
Keep reading our blog for more business tips and insights.
