The Key Advantages and Disadvantages of a Sole Proprietorship

So, you’ve decided to go solo into a business venture. That’s great, but have you weighed the major advantages and disadvantages of sole proprietorship firms? 

Sole proprietorships are immensely popular in the United States, to say the least.

The number of sole proprietorship firms has been increasing steadily and was 27.1 million in 2018. This will only rise further. 

If you’re planning to join the ranks of millions of such sole proprietors in the US, it’s essential that you learn about their advantages and disadvantages first.

It would help you get a better idea about whether it is the best option for you or not.

Let’s get started.

Advantages of Sole Proprietorships

Here are five of the most important advantages of sole proprietorships.

1. Freedom and Flexibility

One of the best advantages of a sole proprietorship is the flexibility and freedom that it offers. As a sole proprietor, you won’t be subject to the strict regulations and guidelines that govern corporations and other businesses. 

Such compliance requirements would only add to the difficulty of operating your business, especially when you’re low on staff, initially. 

2. Easy to Form

Another one of the biggest advantages of sole proprietorships is that they’re extremely easy to form, compared to corporations or even limited liability companies.

You can seamlessly start running your sole proprietorship under your name without many complex regulatory requirements. All you need to do is obtain the necessary licenses and permits to start operating. 

This process can become even simpler if you leverage the services of GovDocFiling. They can manage all the formation procedures and expedite the processing speed. 

If you want to run the business under a name other than yours, you can do so by filing for a fictitious name or DBA (Doing Business As).

3. Less Paperwork

One of the advantages of sole proprietorships is that it requires much less paperwork than other business structures.

Sole proprietorships do not need to prepare annual reports. This reduces your paperwork and the need to hire a bookkeeper to prepare and file those reports, and take care of other legal formalities.

Overall, it is easier and cheaper than other forms of business entities.

4. Simple Taxation

Taxation is one of the other major advantages offered by sole proprietorships. Both sole proprietorships and LLCs offer a feature called pass-through taxation. 

This means that you can file taxes as an individual. As a result, you avoid double taxation (getting taxed both as an individual and a business).

Also, in the case of sole proprietorships, you don’t need to file for an EIN (Employer Identification Number), unlike other business structures.

5. Lower Cost of Operation

LLCs and other business structures need to be registered with the state government before they can start operating. They also need to pay an annual fee to maintain their registration. 

Luckily for sole proprietorships, these requirements aren’t there. You can, therefore, save money and time if you opt for sole proprietorships.

Disadvantages of Sole Proprietorships

While sole proprietorships have a lot of advantages, they’re not without disadvantages. Here are a few notable ones.

1. No Liability Protection

The worst disadvantage of sole proprietorships is that you’re not protected from financial liability in case the business fails. This means that any business liability becomes your personal liability and your personal assets are endangered.

Additionally, the liability here is unlimited. This means that debt collectors can access all your assets, including property, cars, savings, and more. You should get insurance to prevent that.

This is where business structures like LLCs and corporations offer more liability protection.

2. No Partners

When you start a sole proprietorship, you need to understand that you can’t get partners on board at any point. You’ll always have to be a single business owner. 

If you would like to bring in partners, you’d have to opt for another business structure like LLC, partnership, or corporation.

3. Difficult to Raise Capital

It is harder to raise funding for sole proprietorships than for any other type of business entity. It is mainly because Corporations and LLCs are legal entities, while sole proprietorships aren’t. 

Additionally, LLCs and other business entities can have their own business credit cards and bank accounts. As a result, they can easily seek credit for the business from banks, unlike sole proprietorships. 

Also, conventional lenders and banks would look into your personal credit history before extending credit. 

4. Difficult to Sell the Business

There may be instances where you might want to sell your business. That’s where sole proprietorships are at a disadvantage. 

If you’ve generated significant profits in your business, you’ll have to pay capital gains tax (as high as 49%) on the business sale. Absorbing such a tax can be a big challenge for sole proprietors.

Final Thoughts

Sole proprietorships are wildly popular in the United States due to a wide range of factors. Their advantages include ease of formation, low operational costs, freedom and flexibility, less paperwork, and a simple taxation structure.

However, they have some disadvantages too. Sole proprietorships offer no protection from liabilities. Also, you can’t get any partners for your business and may find it challenging to raise capital for it.

Finally, selling a sole proprietorship business is tougher than selling a corporation or an LLC.

Now that you know the advantages and disadvantages of sole proprietorships, decide whether it is the most feasible option for you. All the best!

Author Bio:-

Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.

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Vivek is a published author of Meidilight and a cofounder of Zestful Outreach Agency. He is passionate about helping webmaster to rank their keywords through good-quality website backlinks. In his spare time, he loves to swim and cycle. You can find him on Twitter and Linkedin.