Starting a Sole Proprietorship is the easiest way to set up a business. As a result the most common of all business legal structures is the sole proprietorship. Starting up your proprietorship most probably would not require registration of the business. However if you intend to use a business name other than your name for your company, the state laws require a trade name registration or filing of your company name. According to the view of Internal Revenue Service (IRS) a business will be considered as a sole proprietorship unless you have registered it as a corporation or other business structure such as a Limited Liability Company (LLC) or a partnership.
This is a type of business with unlimited liability. The owner represents the company legally and fully. This means he or she is personally liable for the all debts of the company. This implies in the case of liquidation he or she will have to sacrifice his or her personal assets to settle the debtors. New start-ups, consultancy firms, contractors, part-time businesses are often common examples for sole proprietorships.
It is understood that setting up a sole proprietorship is the easiest way to set up a business. However is it the best form for your business? You need to evaluate the advantages and disadvantages of sole proprietorships compared to the other options, weigh each of them with respect to your circumstance and select it if suitable.
So let us now discuss the relative advantages and disadvantages of setting up a sole proprietorship.
Advantages
Freedom from regulation to the maximum level: As a sole proprietor you will enjoy the greatest possible freedom as this type of business is the least regulated.
Individual decision making and direct control: Since you are the only person who has the ultimate authority you can take decisions without any conflicts. Further it allows you to exercise direct control over the operations of your business.
Start-up cost is low: This is again related to the ease of starting up a sole proprietorship. On the other hand, other business types may be required to follow costly formalities to become eligible to register under the respective type.
The profit is all yours: As you have undertaken the risks of the business individually, you are entitled to all the rewards of the business as well.
Paying taxes is convenient: Filing the taxes is generally easier and quicker for sole proprietorships than for corporations. Your individual and business incomes are considered the same and self-employed tax implications will apply.
Disadvantages
Unlimited personal liability: As we discussed above the owner of the business is personally liable for all debts and actions of the company since a separate legal entity is not created under the sole proprietorships. As a result all the personal wealth and assets of the individual are linked to the business.
No one is there to assist you in decision making: True the fact that there is no one else to take decisions has its own advantage. However it can sometimes be disadvantageous, especially when you require expertise in an area which you are not comfortable.
Poor financial controls: Due to the relaxed regulations which do not require you to maintain financial accounts, there is a tendency of businessmen to completely forget the financial controls which can contribute, to a great extent, to the demise of your small business.
Discontinuity in absence of the owner: As the business and the owner are not separate legal entities but one, the death or permanent disability of the owner automatically means the end of the business.
Difficulty in raising capital: The businesses are expected to grow with time. Growth of your business literally means you need cash to finance the growth plans. However it is less attractive to the outside investors if your business is a sole proprietorship due to the high risk.
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