Wondering if a sole proprietorship is right for your business? Read this concise comparison of the advantages and disadvantages of the business structure.
Deciding on what type of business structure is right for your particular business can be confusing. Naturally, you need to consider your options. TRUiC helps lay out the advantages and disadvantages of sole proprietorships to help you determine if it is the best option for your business.
Reminder: What is a sole proprietorship?
To sum it up briefly, a sole proprietorship is a type of business structure that affords the owner exclusive ownership. Sole proprietorships are sole traders (although additional partners can be added). For example, a nail technician who offers manicures in the comfort of one’s own home (and is not a registered LLC) is a sole proprietorship.
- Learn more about how sole proprietorships operate.
Advantages of a sole proprietorship
- Simplicity: It is simple to control and manage
- Branding and professional image: You can brand and name the business as you want it.
- One person can make the business successful: Only one person is needed to turn a profit.
- No need to share profits: The owner is entitled to 100% of the business’s profits
Simplicity
The main advantage of a sole proprietorship is how simple and quick it is to begin running one. As soon as goods/services are offered to potential customers, a sole proprietorship is formed. There is no need to submit any registration forms or any documentation at all for that matter.
Branding and professional image
The owner can file for a DBA (doing business as/ trade name) to allow them to conduct business under a name other than their own legal name. This can assist with branding and provide the business with a more professional image.
One person can make the business successful
A large team of staff is not needed to make a sole proprietorship successful. The owner themselves can operate the business on their own and happily earn an income this way. However, should the owner wish to hire more hands to help that can be sorted out. The owner simply needs to register for an Employee Identification Number (EIN). Therefore, managing a sole proprietorship to suit your business’s needs is made easier with the flexibility of options available to sole traders.
No need to share profits
As only one person is needed to form and operate a sole proprietorship, the owner is subsequently entitled to all of the profits made by the business. For example, you are a face painter for children’s parties, and you charge $100 per hour. That entire amount goes to the owner for performing the service. Think of it as all the work, but all the pay.
Disadvantages of a sole proprietorship
- It is not an official legal entity: Asset protection is not provided.
- Unlimited personal liability: The owner is entitled to 100% of the business’s debts and losses.
- Investment and loan difficulties: It is not easy getting loans or a line of credit.
It is not an official legal entity
A sole proprietorship is not considered to be a separate legal entity. Consequently, it does not provide any asset protection. This is an important factor to consider with this business structure.
Unlimited personal liability
In the eyes of the law, there is no separation of the business and your personal assets. If your business incurs debts, you will be liable personally for paying what is owed. Likewise, should your business run up costly legal fees you will be responsible.
- Note: Forming an LLC or corporation will provide you with asset protection.
Investment and loan difficulties
As your business will not be viewed as a legal entity, credit lenders most probably will be reluctant to make a deal. Likewise, receiving loans and investments will not be easy as sole proprietorships are not the favoured legal entity for investors.
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