When starting out in business, many choose to be a sole proprietor. With over 70% of small businesses falling under this model, sole proprietorships are the most popular option. But is it right for you? There are several things to consider, so to help you decide on the best option for your business, think about the following:
Advantages:
- Control: The financial decisions and business transactions are all the responsibility of the owner, without the need to report to partners, board members, or shareholders.
- Ease: Sole proprietorships are the easiest type of business to set up. Minimal legal costs are required, and they also involve significantly less paperwork and formalities than other models.
- Lessened Tax Burden: Any business income is reported on the owner’s personal income tax return, without additional business taxes that must be paid by corporations.
- Bookkeeping simplicity: The accounting can often be less difficult with only one owner (no need to track investments/distributions by shareholders).
Disadvantages:
- Risk/Liability: There is no separation between personal and business liabilities. The owner is personally responsible for any and all debts, losses, or obligations of the business, even if incurred by employees of the business. A lawsuit against the business would not only cripple the company, but the owner as well.
- Responsibility: The advantage of having complete control over the business comes with this disadvantage: with great power comes great responsibility.
- Lack of Capital: Many investors will frequently pass up sole proprietors as a sound investment, and banks often only lend to incorporated businesses. Sole proprietors usually must rely on their personal funds and assets to get their business off the ground.
- Perceptions: Potential clients may view incorporated businesses as more reliable or trustworthy than sole proprietorships. Professionalism must be a high priority for sole proprietors to counter this perception.
- Co-Mingling of Funds Causing Bookkeeping Headaches: Often sole proprietors mix business and personal funds making the accounting more time consuming having to track which items are personal versus business.
Many businesses start off as a sole proprietorship and incorporate the business later; other start-ups find it more advantageous to use a different model (LLCs and Partnerships are usually the next choice). Taxes can be a big factor in selecting the right business model as well.
For more information on sole proprietorships, see http://www.sba.gov/community/blogs/sole-proprietorship%E2%80%94-popular-business-structure-right-you. If you are in need of legal advice in regard to this topic, call an attorney specializing in entities or contact our office and we’ll be happy to refer you to an expert we trust!