Advantages and Disadvantages of Sole Proprietorship
Starting off as a Sole proprietor can have several advantages over other business approach. Easy to form and control, Sole proprietorship can help you in many other ways if you have a controlled capital flow and know your customers well. But what if you are entirely a new entrant? These Advantages and Disadvantages of Sole Proprietorship should be enough to help you decide. Besides business profits and ease of control, there are some limitations you need to consider.
What is a Sole Proprietorship?
The word sole pretty much clears the meaning of this term, where a person operates and manages a business independently. A sole proprietor is responsible for all the business activities and claims the losses or profits generated from a business.
The owner/proprietor controls the proprietorship activities, including fulfilling the business needs, meeting the goals, and holding accountability if something goes wrong.
What are the Advantages of Sole proprietorship?
Many business operate under sole proprietorships in the US alone because of several reasons. If you are about to launch a start business under sole proprietorship, there are lots of benefits you are going to get from this decision.
1. Reduced Paperwork
Proprietorship is an easy, quick, and most straightforward form of owning a business. A majority of small startups or companies don’t need to be bothered with the requirements that come with other business entity types.
There is no reason to stress yourself with extra paperwork or expenses if you are a small enterprise or startup. Legal matters, owning a license, and the registration process (as in the case with LLCs) are lengthier, especially when you have a medium or a large-scale business entity.
2. Tax and Return filing is less complicated
Fewer taxes is one of the notable advantages of sole proprietorship business. Other types of business organizations need to have an Employer Identification Number (EIN) with the IRS. However, sole proprietors are not required to file for an EIN. Applying for an EIN means these businesses can collect/pay employees separate from the filer’s social security number. On the other hand, a sole proprietor can use SSN just like any other financial transaction.
Inflow and outflow of resources is well-maintained in proprietorship that means you don’t have to bury yourself under tax requirements neither do you have to hire someone to file tax returns. Sole proprietorships are taxed as a pass-through entity, meaning the business’s income and losses are reported on your personal tax return. Therefore, you don’t have to worry about paying taxes separately for your business.
3. Fewer Charges
Running on a tight budget is the main reason you start with a small business. The freedom to save expenses on registration fees is one of the major advantages of Proprietorship.
LLCs and other business entities require to register themselves with the states before running the business. Most states charge annual fees for registration renewal or extension. Given the tax policies, these fees can go up at any moment. On the other hand, sole proprietorships are a lot better than LLCs in terms of fees (time and hassle) compared to other business structures.
4. Simple and Straightforward Banking
You don‘t have to have a separate business checking or current account to start banking under proprietorship. You can run an LLC business theoretically without a business checking account, but that violates regulations.
As a sole proprietor, you can carry out business payments straight from your personal bank accounts. You don’t need to go through the rigorous process of linking a business checking account. However, if you want to track your business and personal finances separately, you have an option to go for a business checking account.
5. Hassle-free Business Ownership
Sole proprietorship gives you the liberty to start quickly and makes owning a future business easier. By owning your business under sole proprietorship, you are not obliged to some terms and conditions included in LLC, such as agents or company officers.
You can make any decisions, control the finances and functions involved in your business. You’ll never have to deal with board meetings, auditory events, or stakeholders while you are a sole proprietor.
What Are the Disadvantages of Sole Proprietorship?
Given that you have complete control and quick decision-making ability, there are some Disadvantages of Sole Proprietorship. That’s why other business entities exist to counter its limitations. A sole proprietorship doesn’t give you the full range of protections required to run your business.
1. Unlimited Liability
There is no registration with the state, so you’d not be eligible to entertain certain benefits as a legally registered business. Unlike an organization, you’re considered self-employed with a sole proprietorship, which means that you are accountable for business transactions as an individual.
Without any legal protections for your business, you’re solely responsible for any legal, financial, or tax problems to your company. You can’t protect yourself from any action that investors or lenders may take against you if you cannot pay your debt. On the other hand, LLCs offer you protection against such actions.
2. Small Size
A proprietary business aims at a small-sized market. The chances of growth are thin as you have a limited means to take it to the bigger market. A business under sole proprietorship cannot expand operations on a broader scale. Consequently, there are fewer chances to entertain more profits and economies on sale. Making a huge profit suffices that sooner or later, you’ll have to go for an LLC option.
3. The Competitors may outgrow you
Given that the market competition grows faster, the number of competitors is racing away towards gaining a stronghold in the neighbourhood. The emergence of big players in the market kills small-scale businesses. Given that a proprietary business operates on limited resources, your business may generate only short-term benefits.
For example, if you own the only store in the area engaging local customers, your business profits may shorten when there is a mall next to you. People would eventually turn to a more extensive marketplace for all their basic and exclusive needs.
4. Sole Proprietorship is not for everyone
Most proprietors have limited knowledge and experience in the field. If you lack expertise and knowledge about the market trend, you may not handle the market competition.
Upgrading your skill is an essential ingredient to engaging with customers, mainly in changing times when the customers’ preferences and tastes vary with varying economic trends.
5. Sole Proprietary business is less likely to grow
Business under sole proprietorship are most likely to stay within the local limits. Lack of skills, resources, and investment are always the feared disadvantages of sole proprietorship. Since you need competencies to run the business on a large scale, a lack of protection from liability may force you to keep your business small-scale.
6. Hard to find creditor and investors
Finding creditors is one of the notable disadvantages of sole proprietorship since it’s hard to convince them to invest in a small-scale, unprotected business plan. Securing loans and finances for sole proprietary businesses is more difficult as compared to LLCs. Banks and moneylenders like to work with established companies, not just because they can grow more revenue but also because they can have a more substantial history with credit.
Also, an LLC is registered and protected against asset seizure if they default on their loans, whereas a sole proprietary business doesn’t offer a personal guarantee. The bank or creditor may take your property assets anytime if you fail to repay your debt (since there is no legal paperwork).
From the advantages and disadvantages of sole proprietorship, you can calculate which way to go and start your business. Although small-scale, some businesses will require more individuals and more legal protection to keep its safe from financial losses. But if you have decided to set up your business where customers require special attention and investing isn’t as risky, a sole proprietorship is an option that suits your demand.