8 Pros and Cons of Controlling Your Business with a Sole Proprietorship
Starting a new business is both scary and exhilarating. You might wonder what legal actions to take and if you need to partner with or hire people to make your dreams a reality. With a sole proprietorship, you can completely control your new company. These eight pros and cons can help you decide if it's best for your business.
What is a Sole Proprietorship?
Since every business owner starts with just themselves and their ideas, they begin as a sole proprietorship. It’s up to you whether or not to take on other owners or legally separate yourself from your role in the business. Without that separation, you’ll have more monetary gain and responsibility if something goes wrong.
A sole proprietorship gives you total control over your business. You retain personal control over your business instead of registering or incorporating it. It differs from creating a limited liability company (LLC), which you treat as a corporation. While an LLC creates a separation between you and the business, a sole proprietorship treats you equally. As of 2023, around 86% ofr non-employer businesses are sole proprietorships.
4 Pros of a Sole Proprietorship
There are several advantages to keeping your business a sole proprietorship. Here’s what you can gain from it.
As the private owner of your company, you get all the profits that come your way. Since your business remains under your control, there is no limit to what you can do with the funds. With other business models, you must distribute the money you get through the business or to different owners as dividends.
Regardless of how much product you sell, you will see more profit from a sole proprietorship than a different model. You’re responsible for paying yourself and can do so at any time. You also get to decide how much money you put back into your business.
According to the US Small Business Association, a sole proprietorship is one of the simplest business models. It’s easy to see why. Since you’re in complete control, you are the only person you have to worry about.
There are minimal legal costs to remain a sole proprietor, and you don’t have to worry about keeping a registration. No state-level requirements exist for a sole proprietorship, even if you use a separate name for your business.
You can simplify your taxes with a sole proprietorship. Any profits go towards your yearly income tax. According to the Internal Revenue Service, you are still self-employed. LLCs and other business models can get more complicated since others are often involved, and the IRS will separately tax your business.
Each year, you’ll submit a Schedule C form with profits and losses and a Schedule SE form for self-employment. Then, you’re all set.
As a sole proprietor, you retain complete creation and financial control over your business. As humans, we often worry about others disagreeing with our decisions. If you wake up one day wanting to change the product or service you offer, you don’t have to answer anyone about it.
Being a sole proprietor is as close as possible in the United States to total financial control. You aren’t waiting on a check from your employer or having to negotiate with co-owners or employees. You decide what you do, how often you do it and how you utilize your money.
4 Potential Cons of a Sole Proprietorship
While many business owners go with a sole proprietorship for its advantages, there are some disadvantages to keep in mind when deciding what’s best for your situation.
As the only person running your business, you are the only one blamed if something happens to a customer or you end up in severe debt. When starting a business, you must consider potential lawsuits from your location, product or service. You will receive personal repercussions since you are legally the same as your business.
Any money awarded to another party via a court ruling or settlement comes out of your pocket. The same goes for any debt your business acquires. Since you are personally liable, creditors can go after non-business items, like your car or home, to resolve it. You can limit your risk of personal liability by purchasing business insurance.
Your business lives and dies with you when you're a sole proprietor. It’s rare for this type of business to continue if you pass away or cannot further perform business functions. When you separate your business, it’s easier for someone else to take the reins if disaster strikes.
If you want the best chance of your company remaining intact for decades or centuries, a sole proprietorship might not be your best choice. Many business owners weigh this possibility against the likelihood that the values and processes of the company will change without them.
While sole proprietors have clear advantages with taxes, there are some things to consider. Regardless of how you distribute your money, you must pay taxes on all profits earned. You could see a high self-employment tax bill at the end of each year.
While proper financial planning and paying estimated taxes can help, you’ll need to put back a good portion of your profits each year. The Chamber of Commerce recommends dedicating at least 30% of your income to potential taxes.
4. Little Support
When you decide to be a sole proprietor, your business becomes a part of you–not just legally. The failure or success of the company lies on your shoulders, which can increase your stress levels. With no one else to lean on within the business, you must own 100% of the decisions regardless of their outcome.
Some owners enjoy having total control, while others would instead distribute the pressure among co-owners and employees. You’re also solely responsible for attracting investors and raising funds, which is problematic since you can’t sell stock. Sole proprietors generally have a steeper uphill climb when starting their business than other business models.
Starting a Sole Proprietorship
There isn’t much you have to do if you want to begin a sole proprietorship, but there are things you can do to separate yourself from your business mentally. You don’t have to name your business after yourself. A “doing business as” or DBA registration lets you choose whichever name you want.
You could set up a separate bank account for your business to keep from overspending your income. If you decide to hire employees, you must apply for an employer identification number (EIN) through the IRS so they can pay their taxes. Marketing is also something to consider. Purchasing a domain with your business name and setting up a website lets more people learn about and buy from your company, helping you earn more.
Staying In-Control of Your Business
You put your heart and soul into your business and might want to remain in control of its influence and legacy. A sole proprietorship keeps your company close to you, lets you make all the decisions and reap all the benefits.
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