Top 3 Sole Proprietorship Advantages & Disadvantages
Sole proprietorships can be a flexible way to increase operations. But there can also be risks to consider.
How do you know if a sole proprietorship is the right choice for your business? Taking steps to start your business can be exciting and intimidating at the same time. You’re excited about the process and opportunities that can come with it. But there can also be worry when it comes to overall strategy, customer demand and general liability concerns.
A sole proprietorship structure is a simple form of business ownership. It’s a common path to take if you’re a freelancer, growing startup or even if you already have an established business. They don’t require any federal registrations to operate but the owner is held personally liable for any business debts.
There’s no limit to the number of employees that can work for a sole proprietorship. But it can become a delicate balance since the single owner is responsible for all wages, health and safety and taxes.
There are a lot of advantages to a sole proprietorship but it also brings a set of disadvantages. Below are 3 advantages and disadvantages to a sole proprietorship to help you figure out if it’s the right type of legal entity for your business.
Here’s What We’ll Cover:
Advantages of a Sole Proprietorship
1. They’re Easy to Establish and You Have Complete Control
One of the biggest advantages of a sole proprietorship is it's easy and inexpensive to start. And it doesn’t matter what type of business you're starting. It can be a freelance writing business, a food truck or a bike repair shop. It can be a flexible option for those that are just starting out or are running a business on the side.
There’s much less paperwork to get started and the only documentation you really need is a simple business license. Plus, once you’re up and running any business decisions are under your control. This can be beneficial because you can make quick decisions if new opportunities become available.
There’s no need for management approval like with a limited liability company or partnership. You have more opportunities to experiment with new products or test a different business strategy. This lets you change strategies if you need to go in a new direction.
2. Banking Is Straightforward
Have you thought about starting a different form of business organization, like a limited partnership? There are a million different things to take into account and you often need to have a specific business banking account. Banking becomes much more straightforward with a sole proprietorship.
You can make and accept different payments straight from your bank account. There’s no need to go through the process of opening up a specific business account. All you need is an everyday checking account to get started.
3. You Don’t Have as Many Registration Fees
One of the main concerns of any business just starting out is budgeting. How much money are you going to spend on different areas of your business? Chances are you already have all of that mapped out.
Business entities like corporations have to pay registration and legal fees. These can both start high and continue to add up as time goes on. As a sole proprietor, you don’t have these same legal requirements.
This not only lets you keep more money in your bank account but can also save you a ton of time and effort.
Disadvantages of a Sole Proprietorship
1. There’s No Personal Liability Protection
As a sole proprietor, you have the freedom and flexibility to run your business the way that you want. But that also means that you don’t get the same type of benefits that can come with being a legal business entity. For example, corporations can have protections in place to stop creditors from seizing personal assets.
But being a sole proprietor means that you don't have much legal protection. You are personally liable for things like paying taxes and providing health insurance. Plus any other legal costs or financial problems that happen. You could be sued for bankruptcy or malpractice, and you could have personal assets like your home or car seized to cover any expenses.
The main point to understand with liability is that as the sole proprietor you’re responsible for everything. With other business structures like a corporation, the business and the owner are legally separated. So if a corporation is sued there’s no risk to any personal assets and legal obligations are separated.
2. Financing Can Be More Difficult
Banks often want to work with businesses that are already established. This is because there’s less risk on their end when it comes to credit history. And since banks are in the business of making money, already established businesses can have larger revenue.
It becomes much more difficult to build your credit rating since you’re not operating with business bank accounts or credit cards. And since you’re a sole proprietor, your business transactions rely on your initial investment to function.
3. It Can Be Challenging to Raise Capital
Compared to corporations, there are fewer opportunities to raise capital as a sole proprietor. For example, you can’t sell any equity stakes in your business to raise new funds. This can make it much more difficult to have the financial stability to expand or hire more employees.
And similar to the challenge of getting bank financing, the chances that you have to obtain any type of loan depend on your personal credit history. Even if your business is in good standing, if your personal credit history isn’t good then the opportunity to secure a loan is more challenging.
There are always advantages and disadvantages to the things that you do when it comes to business. But it all depends on what’s best for your business, both in the short-term and in the long run. If you’re considering a sole proprietorship, consider a few of these questions before making a final decision.
- Are you looking for a way to quickly set up your business with as few registration fees as possible?
- Are you comfortable with being personally liable for anything that might happen?
- Would you benefit more or less from having a partner, investors or certain government regulations to follow?
If you answered yes to those questions, the advantages of being a sole proprietor might outweigh any disadvantages. That said, it’s still important to look into how your business will operate and any specific needs you might require. When you have all the right information and have weighed the pros and cons, you can make a more informed decision for your company and future success.
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