Mastering the Basics of Sole Proprietorship: A Comprehensive Guide

Over 70 percent of U.S. businesses are owned and operated by sole proprietors or traders. But what does being a sole proprietor involve and is it the right structure for your small business? Here’s what you need to know about the advantages and disadvantages of being a sole proprietor.

“As a sole proprietor, you are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.” 

What are the advantages of being a sole proprietor?

• Ease. As mentioned above, the ease of starting and operating a sole proprietorship is one of the reasons this business structure is hugely popular.
• Low Regulation. Also, sole proprietors are relatively unencumbered by government regulations and can run their business autonomously without the need to report to partners, shareholders and board members. You control all your own decisions and the money you make.
• No Need for a Company Tax Return. Sole proprietors have the benefit of reporting tax on any income earned through their own personal tax return, rather than filing separately as a business – which can save time and hassle. You also won’t need to prepare a balance sheet for your company.
• Flexibility. Sole proprietors also have a lot of flexibility when it comes to their careers. You can easily close your business without too much bureaucracy, or work on a full or part-time basis for another employer without worrying about answering to anyone about your own business affairs (aside from your clients, of course) – another reason this is a popular option for freelancers, many of whom hold down two jobs!

What are the disadvantages of being a sole proprietor?

• Liability. If you are a sole proprietor, you can be sued personally for acts that occur related to the business. This means someone could go after your personal assets (e.g., car, house, personal bank accounts). You may not think now that you need protection against liability, but what if a client holds you in breach of contract or threatens to sue you? Can you afford to put your personal assets at risk to satisfy any claims against your business? As a sole proprietor, there is no legal distinction between the owner and the business.
• Difficulty Obtaining Financing. Other disadvantages can potentially impact your bottom line and growth plans.
• Lack of Financial Controls. Finally, because you aren’t required to produce financial statements or a balance sheet, your financial controls might not be as sharp as the need to be and this could be detrimental in the long term.
• Lack of Professionalism. Many perceive the lack of a company a a sign of a less professional business.