The simplest business structure available to new entrepreneurs, sole proprietorship is a popular choice. But just because it is simple doesn’t necessarily mean its the best for your business. What follows is an explanations of the positive and negative aspects of being in business for yourself, and what options may be better choices if the bad outweighs the good.
What Is A Sole Proprietorship?
Before we discuss the positive and negative aspects of this business structure, let’s first define what sole proprietorship is. Sole proprietorship is a business structure that relies on one person to shoulder all of the legal ramifications of being in business, including financial and representation within the community. Direct sellers, contractors and consultants all fall within this category, as do any other businesses that are not incorporated or have limited liability status.
Advantages of a Sole Proprietorship
There are quite a few advantages to choosing a sole proprietorship business structure. They are:
- Simpler Taxes: A sole proprietor files his or her taxes as if they were self-employed, and therefore will receive the same benefits. Additionally, there is only form to fill out (in the US this is IRS Form 1040; in Canada is the same form as everyone else, the T1);
- Minimal Start Up Costs: Although in comparison to a corporation or limited liability company, sole proprietors have few (if any) start up costs to incurr when choosing their business structure.
- Less Paperwork: When you are a sole proprietor, the need for paperwork is considerably less than for a larger business or corporation — such as payroll. If you are the only employee, then you can pay yourself directly out of your earnings instead of having to write checks.
Disadvantages Of A Sole Proprietorship
As with all business structures, there are both perks and drawbacks to every situation. Here are some of the disadvantages of becoming a sole proprietorship:
- Liability Issues: There isn’t anyone else to take responsibility should something bad happen when you are a sole proprietor, like if a customer slips on the way up the stairs to your business or if your company isn’t able to stay in business after a couple of years and needs to declare bankruptcy. Therefore, if you are thinking about starting a business that has a higher-than-average risk of struggle (such as restaurants or manufacturers), you may be better off using a corporate business structure instead.
- No Regulation of Financial Statements: Although sole proprietors still have to provide the governement with some sort of financial data at the end of every year, there are fewer requirements than with a corporation. And with less attention to the financials, many entrepreneurs flail before they realize they are in trouble. Ensuring that you’ve got a solid financial structure set up before you get going will alleviate this concern.
- Higher Risk of Loneliness or Depression: People who work for themselves are often by themselves, and frequently becoming a sole proprietor means losing the water cooler social aspect of working for someone else. Make sure that you’ve incorporated social time into your work day, whether through networking or other means, so as to reduce isolation.