What are the benefits of a sole proprietorship?

When you start a small business, you’re faced with many initial tasks. One of the first items on your checklist is choosing a legal structure.

When you start a small business, you’re faced with many initial tasks. One of the first items on your checklist is choosing a legal structure.

New business owners often decide to become sole proprietors. But there are a few key benefits and drawbacks to consider.

What is the legal definition of a sole proprietorship?

The U.S. Small Business Administration defines a sole proprietor as a single person. The business is not distinguished from the owner. The owner is entitled to all profits. He or she is also responsible for losses and liabilities.

Consider freelance writers. They advertise their own services. They complete client projects. They accept their own payments. They file their own taxes.

Many small businesses can work under this structure. They include:

• Academic tutors
• Business consultants
• Freelance accountants, graphic designers, web developers, and writers
• Single-person art studios.

Sole proprietors usually work alone. Yet, they can hire employees. In these cases, the business owner handles employee administration. He or she must manage their payrolls and file their taxes.

What are the benefits of a sole proprietorship?

First-time business owners often choose to become sole proprietors. Some benefits of becoming a sole proprietor include:

Fast formation

You don’t have to take formal action to become a sole proprietor. You don’t have to pay fees, unless you need a specific license for your industry. If you are the only owner of a business selling goods or services under your name, you are a sole proprietor.

Immediate start

With less up-front hassle, you can start growing revenue quickly. In fact, sole proprietors can start looking for clients or customers right away. They can accept payment as soon they sell a service or product.

Simple taxes

A sole proprietor will find it easy to file taxes, especially when compared to other business structures. You likely will file a single tax return with a Schedule C. Other business owners file one tax return for themselves and one for their businesses. Plus, sole proprietors pay low tax rates.

Full control

Many people start their own businesses so they can control their careers. Sole proprietors have full control over their business. They can make decisions without consulting anyone else.

What are the drawbacks of a sole proprietorship?

A sole proprietorship is a simple legal structure, but that doesn’t mean it’s ideal for your business. Sole proprietors do experience downsides, including:

Increased liability

As a sole proprietor, there is no difference between you and your business. All wins, like profits, are yours to enjoy. Yet, all losses, like debts, are yours to manage. This can be tricky if you decide to hire employees. All liabilities are your responsibility.

Difficulty in raising capital

Selling stock to investors is a popular way for new businesses to gain capital. Sole proprietors can’t sell stock to investors. New businesses also get loans from banks. But banks don’t like to lend to sole proprietors. If something goes wrong, the individual is responsible for paying back all that money. To banks, that is a risk. Some sole proprietors do find success with crowdfunding, though.

Burden of success (or failure)

Sole proprietors must cope with a mental burden. All success is credited to the business owner, but so is all failure. For some, this can be a worrisome downside.

Other considerations

There are five types of legal business structures. You can form a sole proprietorship, a partnership, an LLC, a cooperative, or a corporation. Each has a mix of benefits and drawbacks that may work best for your business.

A sole proprietorship may be easy to set up, but might not be best for your business in the long run. Review each legal structure before deciding whether you want to become a sole proprietor.

New business owners often decide to become sole proprietors. But there are a few key benefits and drawbacks to consider.