When you decide to start a business, you’ve entered an exciting, yet intimidating world. There is no shortage of processes and responsibilities you suddenly have. Sorting through paperwork and the various forms just to get your business legally set up can be frustrating—especially if you don’t know what type of business you want to be. If you’re still trying to figure out what business entity type is best for you, one option you may want to consider is a sole proprietorship.
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This business structure is generally easy to set up and requires fewer procedural steps than other entities. In fact, one-person companies benefit from sole proprietorships because the structure does not require a complex legal financial setup.
Like any other business structure, there are advantages and disadvantages to the sole proprietorship model, which is what we want to talk to you about today.
Advantages
More Control
One of the top reasons why entrepreneurs enjoy the sole proprietorship model over other structures is that they are not accountable to any boss or supervisor. The entrepreneur or owner is at the helm and the sole decision-maker. There is no need to wait for approval from other people to implement a new guideline, for example. This can be especially useful during an emergency or whenever an urgent decision is needed.
More Straightforward Banking
One significant advantage of the sole proprietorship is that banking is a bit easier. Unlike any other entity structure, sole proprietorships don’t require a business checking account in order to operate the business. As a sole proprietor, you can also make and accept business payments from your own personal bank accounts: you don’t need to go through the process of finding a business checking account, but if you want to separate your personal finances from your business finances, that option is available to you.
Simplified Business Ownership
Not only does a sole proprietorship make it easy to start a business, they also make it easier to own a business. Through a sole proprietorship, you don’t have to worry about the other components tied into the establishment of an LLC or corporation such as company officers or agents. As the sole business owner, you get to have total control over decisions, finances, and everything else involved with how your company functions.
Disadvantages
No Liability Protection
Since sole proprietors don’t need to register with their state of operation, they don’t get the benefits of a having a legally recognized business entity. In a sole proprietorship, you are considered self-employed, which means you’re on your own regarding business transactions. Also, without the legal protections, you’re personally liable for any of the company’s legal, financial, or tax issues.
Harder to Get Financing and Business Credit
Another challenge a sole proprietor faces is that it can be harder to secure loans or finances than for other business structures. Because most banks want to work with established companies with more substantial credit history, they’re likely to shy away from a company without that history.
Harder to Sell the Business
Since sole proprietorships are inherently attached to an individual, it’s very difficult to sell or hand down the company to someone else. Rather than selling the business itself, you’ll probably need to sell your business assets—but even then, the seller won’t be able to acquire the business’ name unless you’ve established a DBA (“doing business as) and either sell or in some other way transfer the usage rights to the buyer.
The most important thing for the owner of a new business to do, though, is too make sure he or she selects the business model which best fits the company needs. It may be worth noting that there are different types of corporations and the business owner may be interested to know that forming an LLC is not quite the same as incorporating. Starting and running your business can certainly be tricky, which is why seeking out guidance is always advisable, especially for the first-time business owner.
