What is Sole Proprietorship?
A sole proprietorship is a business owned and operated by one individual. This type of business structure is not legally separate from its owner. Hence, all business losses are the owner’s personal losses. Today, over 70% of US businesses are sole proprietorships.
What are the Pros of Operating as a Sole Proprietorship?
There are several pros to setting up a sole proprietorship when you compare it to other business structures, including:
- Low start-up costs and easy to set up – There are no upfront costs, strict requirements, or capital to set up a sole proprietorship except to register or obtain the necessary permit or license.
- Flexibility in decision-making and full ownership – As the sole owner of your business, you are the main decision-maker. This provides flexibility and time to make the right decisions for your business.
- Ability to keep profits – Profits can be kept as long as they don’t go above a certain tax threshold. You often don’t need a separate bank account for your sole proprietorship either. Lastly, business costs can be subtracted from income taxes to increase your savings, although you may check with your accountant because this varies from state to state, province to province, and country to country.
- Keeps taxes simple – As a sole proprietor, you just need to file self-employment taxes. Profits are not taxed separately since the business is not a separate legal entity.
What are the Cons of Operating as a Sole Proprietorship?
- Unlimited personal liability for business debts and obligations – Sole proprietors are personally liable for any business debts, putting all their personal assets, such as their car or house, at stake.
- Limited access to capital, money, and assistance – Banks consider sole proprietorships risky. They are reluctant to approve sole proprietors for loans and therefore sole proprietors have limited access to capital. The structure of a sole proprietorship also limits other stakeholders from having an interest in the business so it is difficult to raise money or investment. Sole proprietors cannot hire employees as easily either, since this requires an alternative set of paperwork, so they rely on independent contractors.
- No access to benefits – Sole proprietors often cannot file for unemployment benefits when their business fails. However, in Canada, sole proprietors can contribute to Employment Insurance (EI) to receive unemployment benefits when their business fails or to take a break from their business once they meet the eligibility requirements.
Sole proprietorships are the simplest and least expensive way to start and run a business. This type of business structure may be appropriate for individuals with limited resources.
