Advantages and Disadvantages of a Sole Proprietorship
Sole proprietorships refer to business structures, where a single owner both owns the business and is responsible for managing it. It’s possible to build a hugely successful business using this business structure, and many businesses, like eBay, for example, have already found that success.
As one of the simpler business structures to establish, it’s also inexpensive to set up a sole proprietorship business. You should keep in mind, however, that when you choose to run your business as a sole proprietor, you and your business share the same legal identity. This can have long-term consequences on how you run and manage your business. For this reason, it’s essential to understand what a sole proprietorship is, as well as the advantages and disadvantages it offers.
What is a sole proprietorship?
One of the simplest business structures to set up, a sole proprietorship is a business where the owner and the business are linked to each other. Sole proprietor businesses don’t have a separate legal entity and share the same legal entity as the owner. However, you should keep in mind that sole proprietors have the responsibility of paying any debts associated with their business.
Everyone from freelancers to growing startups can choose to structure their business as a sole proprietorship. Both online businesses, as well as physical retailers, can opt for this business structure. You also won’t be limited by the number of people you can hire as employees. You will, however, be personally liable when it comes to paying their wages, as well as their health and safety at work.
When it comes to your taxes, you’ll need to declare income, as well as expenditures, on your personal tax return. You may also need to pay self-employment taxes, so ensure you check the regulations to find out if you need to.
The advantages of a sole proprietorship
There are several advantages associated with running a business as a sole proprietor. These include:
1. Easy to setup
You don’t need a lot of money, or time, to set up a business as a sole proprietor. Provided you’re both the owner of the business and are in charge of managing daily operations, you don’t need to inform the governmental authorities. You will need to pay fees, however, when you go to register your business name. Depending on the kind of business you own, you may also need additional permits and licenses.
You can even inadvertently be considered a sole proprietor if you work as a freelancer or a contractor. This business structure is especially beneficial if you’re an entrepreneur or just starting a new business.
2. Protect the name of your business
When you’re a sole proprietor, your personal name and your business’s legal name become the same. Should you wish to change the name of your business, then you’ll need to go through separate procedures to ensure that. You’ll need to register a trademark for your business name. You can also file for a Doing Business As, or DBA, to operate your business under a different name.
3. You can hire as many employees as you want
Sole proprietors have no limit on the number of employees they can hire. This can help you by allowing you to grow your team without needing to change your business structure. You should remember, however, that there are certain risks associated with this as well.
As a sole proprietor, it is your responsibility to ensure that your employees are paid on time and in full. You are also personally liable for the well-being of any employee you hire. Despite this, the ability to hire the best talent in the industry without needing to change your business structure can be useful earlier on. As you try to grow and expand your business, you’ll have a talented pool of employees there to help you.
4. You have full control over your business
Businesses that are structured as sole proprietorships are directly linked to their owners. This means that you have full authority to decide which direction your business will go in, as well as when it comes to making important business decisions. You don’t have to answer to shareholders or any legal partners.
This freedom makes sole proprietorship a popular choice for new business owners. Through this structure, you can also experiment with your business before you move on to another business structure, such as an LLC. As a sole proprietor, it’ll also be easier for you to test out your business practices, as well as your products and services, on a smaller market. Then, you’ll have more information and skill by the time you’re ready to grow your business.
5. Sole proprietorships later often turn into incorporations
As you grow and expand your business, you can choose to shift your business structure, if necessary. Successful sole proprietors can go on to incorporate their business, should they experience that level of business success. If that doesn’t happen, you can still choose to keep running your business as a sole proprietor.
The disadvantages of sole proprietorships
There are certain disadvantages you should also be aware of when it comes to operating a business as a sole proprietor. They include:
1. Personal liability
Sole proprietors are considered personally liable for paying employees and contractors, for settling debts, as well as for paying necessary taxes. You’ll also be responsible for any related legal contingencies.
Take, for example, a case where your sole proprietorship business is sued. In this case, since you’re personally liable for your business, your personal assets can be used to settle your debts. This also applies if you file for bankruptcy. You should also be aware of any self-employment taxes that you may need to pay. Essentially, you are personally liable for any legal issues your company could face, as well.
2. Raising money can be difficult
Since sole proprietors share personal liability over their company, banks and investors may be hesitant to lend money. Instead, as a sole proprietor, you can consider alternative funding options. Both bootstrapping, as well as crowdfunding are ways you can raise capital for your business.
Choosing to run your business as a sole proprietor can offer several benefits, as well as a few risks. Entrepreneurs and small business owners often choose to start their business journey as sole proprietors. This is because it’s easy to set up a business as a sole proprietor. You can then change your business structure when your business grows and expands.
However, you should also consider remembering that you’ll be personally liable for your business and be considered the same legal entity. It can also be more difficult for you to get funding from traditional sources earlier on.
As a business owner, you should also consider business insurance Australia. This is as both you and your business are exposed to certain risk factors that you should prepare your business for. Business insurance can enable you to protect your finances in the event your business gets sued, faces business disruptions, or encounters others risk factors. Learn more about small business insurance.