The Pros and Cons of Operating Your Business as a Sole Proprietorship
People who want to start a business are usually advised to choose a business structure to protect their personal assets. This usually means going for a corporation or an LLC. However, there are some cases when a sole proprietorship could be the right option. It is not the optimal business structure, but not everyone has the time and costs to build a more formal structure. It could also be the perfect structure for the size or type of business you’re in. Let’s take a look at some of the pros and cons of operating a business as a sole proprietorship.
Pro – It’s Easier to Set Up
One of the most significant benefits of setting up a business as a sole proprietorship is how simple the process is. You don’t even have to do anything as sole proprietorships don’t need to be registered with the state to operate. You can start running your business under your name or with a DBA, but you will have to make sure that your business name is not already taken, or you could be infringing on someone else’s trademark rights.
Con – Your Personal Assets are Liable
The biggest drawback of a sole proprietorship is the fact that your personal assets will be exposed. In addition, when someone sues a sole proprietorship, they are suing you as a person as you and your business are one legal entity. However, this doesn’t mean that you can’t take steps to protect yourself, as you could get sole proprietorship insurance. Sole proprietorship insurance will protect you against lawsuits, for instance. But, if you’re in a high-risk business and have lots of assets, going with a sole proprietorship is not always recommended.
Pro – Easy Tax Setup
One thing that surprises many people when they start a sole proprietorship is how simple the tax setup is. You will be required to set up an EIN with most businesses, but it’s not necessary if you’re a sole proprietor. You’ll be able to use your social security number instead. Know, however, that you can always file for an EIN if you want to, and it does have some advantages, especially if you intend to hire people. Filing taxes for a sole proprietorship is also much easier as they’re seen as one single pass-through entity so that you can file everything on your 1040 form.
Con – Getting Financing is Much Harder
You have to know that banking and getting financing will be much more challenging if you run a sole proprietorship. Financiers will see your venture as a more significant risk and might be reluctant to extend loans to you. Also, your personal credit will significantly impact whether you can get a loan or not, and you may have trouble getting things like merchant accounts. Also, you won’t be able to bring outside investors in as sole proprietorships can only be owned by one person.
You have to consider these things before you start a sole proprietorship. Of course, you shouldn’t scratch them off completely, but they can be limiting, so weigh up the benefits and disadvantages carefully and make the right decision for you.