A sole proprietorship is an unincorporated business owned by one person. It is one type of structure that a company can take.
The Small Business Association calls it the most straightforward and most common type of business structure. That’s because you and your business are viewed as one—you get all the profits, and you take all the losses and liability.
This simplicity has both advantages and disadvantages. Let’s break that down for you.
What are the advantages of a sole proprietorship?
Getting your sole proprietorship off the ground is fast and easy. In fact, there are no official legal requirements for formation. You simply have to be the sole owner of your business.
However, there are potential steps you may have to follow, depending on the specifics of your business.
- If you’re not going to operate under your own name, you need to file a “Doing Business As (DBA)” form for your business name.
- You also need to get all the permits, licenses, and zoning clearances as relevant to your business and as legally required by the locale in which you operate.
- If you’re going to hire employees, you need to apply for an Employer Identification Number (EIN) from the IRS.
There is minimal paperwork and no complex legal wrangling for sole proprietorships. And since you are running the ship, you get to call all the shots.
What are the disadvantages of a sole proprietorship?
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On the other hand, since you’re running your own ship, the buck stops at you. There’s no distinction between you and your business from a legal and tax standpoint, so all liabilities, debts, and legal issues land at your door.
For example, if your business gets sued, it’s the same as you getting sued. That means that your personal savings and assets are vulnerable and may be taken away to pay a successful lawsuit or debt.
Since sole proprietors are considered self-employed, you may also need to make estimated income tax and self-employment tax payments during the year. Hiring an accountant can ease the process here.
What other business entities can I use?
In addition to sole proprietorship, here are other business entities that may fit your venture instead:
- Limited Liability Company (LLC);
- S corporation; or
- C corporation.
There are advantages and disadvantages to each, including liability coverage, tax breaks, additional compliance requirements, and potential partner conflicts.
The type of structure you choose will affect both the legal and financial requirements you must follow when operating.
Check out this breakdown for more details on the different types of business entities, including the pros and cons for each.