It’s a common thing for most small businesses to start as a sole proprietorship. It means that there is only one owner for the entire structure.
However, are there as many advantages of sole proprietorship as they claim to be? In this article, we will detail all the advantages of sole proprietorship as well as the disadvantages.
What is Sole Proprietorship?
Simply put, sole proprietorship is a basic type of structure when it comes to business. It means that a particular enterprise is owned and run by one single person. It typically has the leverage to some extent over other models of business, such as a corporation. The reason is that it does not involve filling out as many requirements as a corporation does.
Another reason why a sole proprietorship is so attractive to people all over is the following. It’s incredibly easy to start a small business in this way. Apart from that, if you are the only owner of the company, you get to keep all the profits. You also get what to decide what to do with it, without having to consult with anybody else.
However, even though you have all these benefits, you must remember the following idea. You are the one and only responsible for everything that happens in your company as well as for all your employees. If your firm commits any violations whether willingly or not, you will be held responsible as well. In other words, you no longer have a business. You are your business. The sooner you understand and accept that, the better.
That being said, it’s time to review the advantages and disadvantages of the sole proprietorship.
The Benefits of Sole Proprietorship
- The extreme ease with which you can start one. As opposed to a corporation, not only is it easier from a legal point of view to get a proprietorship off the ground, but it’s also a lot cheaper. There are some states which even allow you to start it off without paying the double taxation which they impose on corporations.
You can name if after yourself if you choose but may also use a made up name as a marketing strategy.
- Benefits regarding taxes. The individual who owns a sole proprietorship does not have to file distinct business tax reports. However, they will still have to list information about their company to which they must add the figures comprised in their individual tax return.
Even if it sounds like a drag, you should do it. The reason is that it will save you a lot of money on accounting as well as on tax filing.
They will then tax your business in report to your personal income and not apply tax rates for corporations.
- Employees. One of the advantages of sole proprietorship is that you get to hire your individual staff. Apart from the benefit of having people working for your company, you can also receive tax breaks on the account on having created jobs.
Another advantage here is that you can also give a job to your spouse within your firm without declaring him or her as an employee.
Sole Proprietorship Example
A married couple can start a sole proprietorship as one person. Even so, only one of them can assume the liability for the business.
- Making the decisions. As noted above, when you own a sole proprietorship, you are literally the king of your castle. All the decisions are in your hands.
However, if that gets to be a little too much for you at a certain point, you can always transfer your sole proprietorship to someone else.
- Hiring legal help. In case you were wondering if you need to consult a lawyer before you create your sole proprietorship, you will be happy to find out that you don’t. However, your happiness might be a bit subdued when we tell you that, even if you don’t need to, you should still see one.
The main reason is the fact that business laws are different from one state to another. A legal business consultant can tell you what you need to do and what you should be aware of. Think about it this way. It’s your private business in which you’ve, probably, invested a considerable sum of money. Don’t risk it by taking advice off the internet.
The Disadvantages of Sole Proprietorship
Like everything else in life, the advantages of sole proprietorship come with a dark side as well. Here are the drawbacks.
1. The Liability Issue
As the owner of the company, they will hold you responsible if there are any losses, violations of the law or debts. For example, if you do have a debt to your name, the money will be taken from your personal account and not that of the company. In the same way, if any of your employees commit a crime related to the business, the victims can and, probably, will sue you.
All these concepts vary greatly from life in a corporation. If something happens there, the members of the board will be safe from violations and losses.
We listed above a lot of advantages of sole proprietorship tax-wise. However, the main drawback for the owner is that he or she must pay taxes on employing themselves. Apart from that, there are some tax benefits which they will not deduct for you. An example would be the health insurance premiums for your employees.
3. Continuity or the Lack of It
One thing you should know about owning a sole proprietorship is that it will cease to exist if the owner dies or becomes incapacitated in any way. When that happens, thaw law will liquidate the business itself and transform it into a part of the owner’s personal estate. In this way, its beneficiaries can distribute it as they wish, just like any other asset that once belonged to the proprietor.
Unfortunately, this state of things can and, probably, will have very high taxes as a consequence. They will fall upon the beneficiaries because of the estate and inheritance taxes.
It can be difficult to raise some capital. As you might have imagined, when it comes to a sole proprietorship, the owner himself has to come up with the money to start it. Unfortunately, he cannot issue stocks or create other investments to generate capital.
So, circling back to our main question, are there as many advantages of sole proprietorship as they claim they are? The answer is yes. Without a doubt, there are many benefits of choosing this business structure over a corporation one. Still, you should always be aware of the disadvantages as well.
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