A sole proprietorship is the simplest business structure in which one person is the owner and operator of the business. This sole proprietor is responsible for all aspects of the business and reaps all profits of the business.
Because there is no legal distinction between the business and the owner/operator, the owner/operator is in direct control of the proprietorship’s activities and is accountable for all its debts.
How Do Sole Proprietorships Differ from Other Business Models?
Other common business models include varying partnerships, corporations, limited liability companies (LLC), and others. A big difference between sole proprietorships and these other options is that the sole proprietor is solely in charge and responsible.
In partnerships, there are other persons sharing the responsibilities of the business. Another big difference between sole proprietorships and corporations or LLCs is that the financial liability lies with the LLC and not the individuals operating the LLC.
For example, if the LLC cannot pay its debts, the operators’ personal assets have protection against debt collection for the LLC’s unpaid debts.
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What are the Advantages of Sole Proprietorships?
- Beginning a sole proprietorship is easy. Unlike other business structures, starting a sole proprietorship requires less paperwork and time to create a legal sole proprietorship.
- It is cheap to start a sole proprietorship. Where other business structures have increased fees and filings to open for business, sole proprietorships tend to be affordable models to start and maintain.
- There are some tax benefits for a sole proprietorship. Instead of the business having to file its own tax return, sole proprietors claim businesses gains and losses on their own individual tax return. Also, the sole proprietorship is taxed using individual income tax rates rather than corporate making it simpler and cheaper to comply with your tax obligations.
- Sole proprietors can employ others and grow their business. Sole proprietorships can hire others and enjoy the tax benefits from doing so. Additionally, spouses of the owner can work for the sole proprietorship without being declared as an employee.
- Owners have complete and direct control over all decision making. Because the owner is the business, the owner makes all decisions for the business rather than sharing power with a partner or corporate board. This allows owners the freedom to drive the business in the direction they desire.
What are the Disadvantages of Sole Proprietorships?
- Owners are fully liable. If business debts become overwhelming, the individual owner’s finances will be impacted. When a sole proprietorship fails to pay its debts, the owner’s home, savings, and other individual assets can be taken to satisfy those debts.
- Self-employment taxes apply to sole proprietorships. Owners must pay self-employment taxes on the business income.
- Business continuity ends with the death or departure of the owner. Because the owner and the sole proprietorship are one, if the owner dies or becomes incapacitated then the business dies with them and the money and assets of the business become part of the individual's estate. The assets and money are subjected to inheritance taxes and can have a great impact on employees of the sole proprietorship.
- Raising capital is difficult. Initial funds of the business are generated by the owner and raising funds for the business can be hard since they cannot issue stocks or other investment income. Loans may also be difficult if the owner does not have enough credit to secure additional money.
Can a Lawyer Help Me Decide if a Sole Proprietorship is Right for Me?
Yes, a qualified business lawyer can help you decide if a sole proprietorship is the right model for your future goals.
If you select a sole proprietorship or any other model, a lawyer can draft the legal documents needed to create the entity and help you comply with your legal obligations as a business owner.