One major consideration entrepreneurs need to make when launching a new business is its structure. When it comes to the legal structure of the business, you have several options to go with, including partnership, corporation, limited liability, and sole proprietorship. There are lots of factors that can affect this decision, such as the nature of your business, the availability of resources, and the capital needed to start your business.
Many business owners choose to set up their business as a sole proprietorship, but you must know about the potential pros and cons of a sole proprietorship business first. Let's dive into the details.
What is a Sole Proprietorship?
A sole proprietorship is a common and simple business structure. It’s an unincorporated business that is owned by only one individual. Many people are confused about whether the phrase refers to a person who runs the business or the business owned by an individual. Basically, the phrase refers to both, as there is no legal distinction between the business and the owner in this type of structure.
Here are some other key features of a sole proprietorship:
- A sole proprietorship doesn't have a separate legal entity. This makes it different from corporations and partnerships.
- A sole proprietor owns all the properties or assets of the business.
- A sole proprietor bears all the benefits and risks linked to their business.
Pros and Cons of a Sole Proprietorship Business
Now that you understand the basics of what a sole proprietorship is, let’s take a look at the advantages and disadvantages of a sole proprietorship organization.
Pros of a Sole Proprietorship
Easy & Cost-Effective to Build: One of the best features of this business structure is that it’s straightforward and inexpensive to establish. The costs are minimal, with limited expenditures needed to obtain the necessary permits and licenses. If you run your company under your name, you may not even have to register your brand name before working as a sole owner; however, requirements will differ by state. This liberty makes the sole proprietorship perfect for startups, home-based, self-employed contractors, or part-time businesses.
Complete Control to Run the Business: A sole proprietor is the only owner of the company and has full access to make their own decisions to run the business.
Complete Flexibility: Many people want to be their own boss, this may be a contributing factor in your decision to choose a sole proprietorship. For instance, when it comes to tax submission, business losses can be carried backward or forward or deducted against other forms of income. For example, if you face losses, those can be subtracted against personal income. This flexibility can make the sole proprietorship an ideal option for people shifting from employee to self-employed.
Cons of a Sole Proprietorship
Unlimited Personal Liability: As a sole proprietor, you're personally liable for 100% of all business obligations and debts. This responsibility covers all of the assets of the sole owner, like his/her house, car, and so on.
Uncertainty: Life is full of uncertainty and if a sole proprietor becomes mentally incapacitated, physical injured or dies the business will likely shut down. By contrast, in a structure like an LLC, the registered agents or other board members can carry on operational duties in the absence of the owner.
Hard to Sell: A sole proprietorship can be more challenging to sell as the business is entirely tied to the proprietor. Since there is no discrimination between the assets of the business and the assets of the owner, it's hard to achieve the proper valuation of the company.
Importance of Having Insurance for Sole Proprietorship Businesses
As a sole proprietor, if you think insurance is the last thing you need, think again. Since all liability falls on the proprietor it’s a vital piece of protect you need.
Owners of sole proprietorships are responsible for the injuries and damages caused by their business’ activities. If you get sued, both the business as well as personal assets are at a risk.
If you're operating as a sole proprietor, you can lower the risks by having Sole Proprietorship Insurance. Depending on the operations of your business, you may be required to purchase one or more types of liability insurance. There are many insurance policies that can protect your sole proprietorship, including:
- General Liability Insurance
- Professional Liability Insurance
- Product Liability Insurance
- Commercial Property Insurance
- Workers Compensation Insurance
Finding the right policies for your business can be daunting if you’re not sure what you need try using our advice tool.
The Key Takeaway
A sole proprietorship can be a great choice for your business that delivers several benefits to owners. By understanding the pros and cons of a sole proprietorship business you’ll be able to make an informed decision that will help you run your business.
Though this business structure doesn’t provide liability protection to owners and makes it hard to sell, they are incredibly simple to establish. Consider all these advantages and disadvantages before making a decision, make a proper plan for your business, and get started today to take your business to new heights.