A sole proprietorship is the easiest type of business to establish but comes with some drawbacks. However, while sole proprietorships are the
most common type of business, there are other options, such as incorporating. Ultimately, the
business structure that’s best for you will be highly dependent on your circumstances.
To help you decide, we’ll review the pros and cons of running a sole proprietorship.
What You Should Consider Before Starting a Sole Proprietorship
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survey found that 63 percent of 20-somethings either own or want to open a business. While there are many motivating factors, the desire to be your own boss is probably among the most popular. When you run the show, you set the terms.
Many of the people who go on to start a small business will end up establishing a sole proprietorship. As a sole proprietor, you’ll have the final say regarding when you’ll work, where your business will be located, what products and services you’ll sell, and how you’ll offer them. You’ll also reap the profits.
However, there are drawbacks to owning a small business. You’ll likely have to put in long hours, with 33 percent of small business owners
reporting that they work between 40 to 49 hours per week, while 30 percent put in 50 to 59 hours per week. In addition, roughly half of businesses fail within five years.
Clearly, running your own business comes with a lot of benefits, but also some drawbacks. Particularly, there can be significant pressure that comes with operating a sole proprietorship. Below, we’ll review the pros and cons of this type of business.
The Benefits and Downsides of a Sole Proprietorship
Pro: Easy to Set Up
Establishing a sole proprietorship is the quickest, easiest, and most affordable way to set up a business. In many states, you don’t even have to register if you’re operating under your own name; you can simply start conducting business. You also won’t have to file the annual reports that are required for corporations.
Con: You’ll Be Completely on Your Own
Unfortunately, being the sole decision maker means you’ll have to bear complete responsibility. Many entrepreneurs would benefit from outside opinions and partners who can shoulder burdens. This is especially true during crisis situations. Sole proprietors, however, are completely on their own and can quickly be overwhelmed. So, if you get burned out easily, forming a sole proprietorship might not be a good idea.
Pro: One Decision Maker
A sole proprietorship is owned and managed by one person, who’ll be the sole decision maker. This means there’s no board to negotiate with and no partners you have to coordinate with. Due to this, you’ll be able to make decisions quickly, and can make choices that reflect your best interests.
Con: Harder to Separate Personal and Business Finances
Many entrepreneurs prefer to separate their business and personal lives. Unfortunately, that can be very difficult with sole proprietorships. You may quickly find your company and personal finances becoming entangled. In addition, you may have to use personal assets, such as your home, for business purposes.
Pro: Taxes Are Generally Simpler
Sole proprietors don’t have to pay corporate income taxes. Instead, their income is taxed as personal income. For many entrepreneurs, this makes taxes easier to handle. However, in some cases you may be able to lower your tax bill by setting up a corporation.
Con: You’ll Be Liable
As a sole proprietor, you’ll face certain liabilities. You might own your store, for example, but could need to make mortgage payments on it. As a sole proprietor, you’ll be responsible for all your business’s debts.
Instead, some entrepreneurs prefer to set up partnerships to spread risks among multiple partners. Others decide to set up a corporation, establishing a separate legal entity that can take on liabilities itself. Doing so will reduce risks but create other challenges.
Pro: You Own Everything
As a sole proprietor, you can keep all of the business’s profits. Further, you’ll own any assets that come from your business. When you retire or move on, you’ll be able to pass the business onto your heirs as well. With incorporated companies, you must consider investors, equity shares, and other factors.
Conclusion: Sole Proprietorships Are Often Best for Smaller Ventures
Establishing your own small business may be your goal, but you should keep in mind that while many entrepreneurs are successful, plenty of them fail too. Therefore, if you’re going to start a small business, you must determine how to form your company.
Sole proprietorships often work best for lone entrepreneurs who are starting new businesses. Still, as your business grows, risks often increase, so you may want to set up a different business structure eventually. That might mean finding partners or incorporating your company. Changing your structure could reduce risks and make it easier for you to separate your business from your personal life, which is crucial.
Have any suggestions for entrepreneurs pursuing sole proprietorships? Let us know in the comment section below!