Among the different business structures, sole proprietorship is considered and most basic and simplest form. Apart from being a common preference by business owners, it is also owned solely by an individual. Nevertheless, this type of business structure has advantages and disadvantages attributed to it. Here are some of the benefits and drawbacks of a sole proprietorship business type.
List of Advantages of Sole Proprietorship
1. No Boss
One of the reasons entrepreneurs prefer sole proprietorship over other business structures is not having to be accountable to any boss or supervisor since he or she is the owner of the company. This means that the entrepreneur himself is the one at the helm of the business and decisions are made solely by him. There is no need to wait for a go-signal from other people to implement new rules and regulations. This privilege can prove to be useful during emergencies and decisions are needed right away.
2. Low Start-up Costs
Sole proprietorship ranges from having no employees and up to a number of employees which is easier to deal with in terms of expenses, taxes and compensation. Costs of opening a business with this structure do not require costly legal expenses as well as corporate taxes. Moreover, if the business only has few employees, health care insurance coverage is not really an obligation of the business owner. As for bonuses and incentives, there will be lesser people to pay.
One of the perks of sole proprietorship is that the owner can keep all the profits to himself unlike if he is on a partnership with another individual or if he has a corporation with investors where profits will be divided among themselves.
4. Total Business Control
Business owners who are sole proprietors can make quick decisions as well as have complete control on how to manage the business. This can be beneficial to the entrepreneur since the owner does not have to discuss issues with business partners and will be able to handle complicated problems without someone else disagreeing or debating his proposed solutions. Also, if wrong decisions are made, the sole proprietor only has himself to blame.
5. Easy Process
Apart from the lesser requirements in forming sole proprietorship like applying for the name of the business and opening a bank account with only one signatory, changing business structures is also less complicated in sole proprietorship. If the owner decides to incorporate the business or change it into a partnership, he or she can easily decide to do so, without having to consult with other signatories and co-owners. And if after some time the owner decides to apply for business closure or stop operations, documents required and the process are lesser and simpler.
List of Disadvantages of Sole Proprietorship
1. Personal and Business Assets
One of the drawbacks of sole proprietorship is that the owner’s money is tied to his business in the sense that finances of the owner and the business are one and the same and that there is no legal separation between the two. If the owner’s business encounters a problem or incurs debt and other obligations, he can risk losing his personal money to settle these issues. Moreover, his personal properties can be at risk if the business fails or if it faces legal actions from disgruntled employees as opposed in a corporation where personal assets are not connected to the business assets. And although sole proprietorships are not safe from legal issues as other business structures, the owner has to deal with these problems alone compared to owners of corporations where there are other people involved and not only one is liable.
2. Less Capital
The flipside of not having partners or other investors in a business is not being able to come up with a large amount of capital to start and sustain the company. Even if the business idea is feasible and looks lucrative, coming up with a substantial amount of money to get the business going can be difficult after some time if there is no additional capital. Unlike in a corporation where there are investors who can make additional investments should the need arises, sole proprietorship often results to some owners relying on their personal money and loans to operate the business.
Being the only one to make decisions has its advantages and disadvantages. If problems encountered are complex, it helps to brainstorm with like-minded people whose interest centers on making the business profitable. When it comes to making serious decisions, there will be different views which will provide balance in the management.
4. Work Life Balance
Sole owners of businesses often find it hard to go on vacations since they have to look over the company. This can be a setback since their personal life and family can suffer because of too much work and pressure running the company. And in instances where the owner happens to get away from work for a holiday, he or she still has to monitor or be on top of the business especially in times of problems.
Another drawback of single-handedly owning and running a business is paying taxes personally. Since the business and the owner are one and the same, owner has to pay taxes as self-employed. On the other hand, if the business name is different from the owner’s name, the money to be used for paying the taxes will still come from the business owner. Also, some tax benefits are not given to sole proprietors such as health insurance benefits for employees. In the instance that the owner dies, the business becomes part of the owner’s estate. Consequently, it will be subject to inheritance taxes if there are beneficiaries, they might be dealing with paying costly taxes.
Sole proprietorship has benefits and drawbacks and it is important for a would-be entrepreneur to consider these factors to ensure he or she decides on the suitable business structure for the company. Perhaps, choosing the right form depends on the nature of the business since there are more sustainable business endeavors run by a sole owner while there are those that will benefit from having more investors and owners.
Natalie Regoli is a child of God, devoted wife, and mother of two boys. She has a Master's Degree in Law from The University of Texas. Natalie has been published in several national journals and has been practicing law for 18 years.