One of the simplest business entities to apply for is a sole proprietorship as no employees or complex applications or tax return paperwork is needed. In this article, we attempt to explain in the simplest way possible what a Sole Proprietorship is as well as the advantages and disadvantages that come with having one as well as other useful info such as tax policies and various other paperwork and running costs. If after reading the below brief presentation you need more info on the subject of what is a sole proprietor you can head over to the TRUiC website to find the answers you are looking for.
What is a Sole Proprietorship?
A Sole Proprietorship is an informal business structure that is not a legal entity and is not separated from its owner. The business has no liability protection meaning that the business’s liabilities automatically pass on to the owner as does taxation.
Advantages of being a Sole Proprietor
- Very easy to set up
- Not a great deal of cost and no paperwork involved
- Tax benefits: you and the business are considered to be one entity for tax and liability reasons. This can have both benefits and disadvantages. The income is claimed on your personal tax returns which means you are taxed at a lower rate compared to being taxed as a business.
- Retention of control: you are the only one making the decisions
Disadvantages of doing business as a Sole Proprietor
- No Liability Protection
The biggest disadvantage is unlimited liability which means that your personal assets are not protected, they can be used if your business incurs any liabilities. So it comes down to how risky your business is, if there is a significant amount of risk involved in your business then maybe this form of business isn’t the best choice as your personal assets are not protected.
- Lack of Permanence and Financial Resources
When the business owner passes away the business ceases to exist. You also have limited financial resources as you are just using your personal finances and human capital (since you are the only employee of the business) thus the company relies on only your skills and competences. If you run out of money this might be bad for your business since you don’t have alternative financial resources.
- No Tax Benefits
A sole proprietorship has pass-through taxation meaning that all of the income to the business is taxed as personal income to the business owner. This is a good arrangement as long as your business is not that profitable, if it grows in size you should switch to a different business structure.
- Less Credibility and Branding Opportunities
A Sole Proprietorship is not a legal entity and is not separate from its owner thus the business cannot do anything that is not under the surname of the owner such as creating a bank account or issuing an invoice and the business’s legal name must be the same as the owner’s surname. This causes problems as it affects the business’s credibility when your brand name cannot be separate from your surname and you cannot really build a brand around your business.
One way to solve this problem is to form a DBA that will allow your business to form a brand name that is seperate from the business owner’s surname and that can give the business more credibility as you can open a bank account under a DBA as well as issue invoices.
Formation and Running Costs
There is no paperwork that should be filed with the secretary of state and the cost of starting and running a Sole Proprietorship is very cheap.
In the end you need to weigh the advantages against the disadvantages and compare them with what your business needs. If your business doesn’t have a lot of inherent risk or high profits and you are also just starting out and are looking at starting a business with minimal costs then this informal business formation may be the most suitable for you.
