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What are the benefits and drawbacks of a sole proprietorship?

On Behalf of | Apr 30, 2021 | Business Formation |

A lot of budding entrepreneurs and business owners operate as sole proprietorships because there’s really no complex paperwork involved.

But is sole proprietorship wise? Before you decide that this is the type of structure you want to use for your business, you should learn a little about the pros and cons of this way of operating.

What are the benefits of a sole proprietorship?

Chiefly, you and your business are the same legal entity. That means that the taxes on the business profits are filed under your income tax, so that will likely make them easier to handle. You may also appreciate the fact that, unlike a corporation, you don’t need any complicated paperwork to legally operate. There’s generally a lot less bookkeeping involved, and it can be easier to make changes to your company down the line.

What are the drawbacks of a sole proprietorship?

Unfortunately, the biggest drawback is the same: You and your business are the same legal entity. This means that if someone makes a claim against your company, they could end up with your personal assets as payment. When you operate as a limited liability corporation (LLC), for example, your business becomes its own legal entity and there’s a wall of protection between the claims of your business creditors and your personal assets. You may also find it much harder to gain funding for your company when you need it.

Sometimes, the easiest type of business structure you can use isn’t really the best solution, especially if your business is starting to grow. If you’ve been operating as a sole proprietor for a while, it may be time to talk about your other options with an attorney.