Pros and Cons of Forming a Sole Proprietorship

Deciding on the Best Small Business Structure is Important

Apr 29, 2009 Suzanne Bechard

One of the most important considerations in starting a small business is the choice of business organization. The sole proprietorship has advantages and disadvantages.

The most common small business structure is the sole proprietorship, a business entity owned and operated by a single individual. It is not incorporated, and there are no formal requirements for starting this type of business. There are a number of advantages to the sole proprietorship, but there are some drawbacks as well. Each should be carefully considered, with the advice of a business attorney and tax accountant, before one embarks on forming a sole proprietorship.

Sole Proprietorship Is Easy to Form

One of the big advantages of the sole proprietorship business structure is its ease of formation and maintenance. The sole proprietor need not file any forms with a state agency unless he or she decides to operate under a fictitious name. If the business owner wishes to give the business a name other than his or her own name, he or she may have to file a fictitious name with the county recorder or clerk of court.

Sole Proprietorship Features Centralized Management and Complete Control

Many business owners are attracted to the sole proprietorship structure because sole proprietors retain complete control over all aspects of the business. There are no partners or investors to answer to. All management decisions remain in the hands of the sole proprietor. Independent-minded entrepreneurs find this feature of the sole proprietorship very appealing. Moreover, the sole proprietor avoids the prospect of joint liability for the actions of his or her partners.

Tax Advantages- No Double Taxation for the Sole Proprietor

Another advantage of the sole proprietorship model is that the business's profits and losses are treated as the personal profits and losses of the business owner. There is no "double taxation" as with the typical corporate form. Profits of the business are taxed only once, as income to the owner. Losses or expenses are deductible.

Sole Proprietor Has Full Responsibility

Being a sole proprietor can be a lonely existence, and this can be a disadvantage. Having complete control over the business also means the owner has complete responsibility for everything related to the business. For the sole proprietor, there is no one to share ideas or give advice on a daily basis. Running a small business usually requires long hours, and for a business person running a sole proprietorship, this often means nobody with whom to share the workload.

Sole Proprietorship Lacks Perpetual Existence- It Dies With Its Owner

Another potential disadvantage of the sole proprietorship as a business entity is that, unlike the corporate form, it terminates upon the death or incapacity of its owner. For this reason, the sole proprietorship structure might not appeal to a business owner who envisions passing the business down to his or her children and grandchildren.

Sole Proprietor Risks Unlimited Personal Liability for Business Debts

By far the biggest disadvantage of the sole proprietorship is that all of the owner's personal assets, whether related to the operation of the business or not, are fair game for settling business debts. Thus, the owner who fails to pay a supplier or who is found liable for a business related tort has no protection from personal liability and could potentially lose his or her house or other personal assets.

Researching Business Organization Options

Certainly, the sole proprietorship form of business has both pros and cons. Anyone considering launching a small business should do careful research into the various forms of business entities available, and should consult with a business law attorney and other professionals prior to taking the leap into small business ownership.