The Pros and Cons of a Sole Proprietorship - BusinessTown

The Pros and Cons of a Sole Proprietorship

This form of business is the easiest to start because you need to obtain only whatever licenses are required in order to begin business operation.

A Sole Proprietorship Puts You in the Driver’s Seat

Deciding what legal entity to use for your business is an important step in starting a business. Hence you want to carefully weigh at least the most common choices of legal entity including sole proprietorship, LLC or Limited Liability Company, partnership and corporation.

The sole proprietorship gives you absolute control over your business, more so than other business structures, such as partnerships and corporations. Very often, a small business owner will choose to start with a proprietorship. As the business grows, he or she might explore the possibility of forming a partnership, a corporation, or a Single Member Limited Liability Companies (or sole LLC).

You should contact your local county or city clerk’s office, or talk with a local business lawyer to determine what is required to operate a business in your area. If your business involves the sale of a product or service in other states, you may need to obtain a federal license or permit.

Related: LLC, Corporation, Partnership, or Sole Proprietorship: Which Legal Structure is Best for Your Business?

If you are doing business under what is considered a “fictitious name,” then you technically need to register it in most states. So, for example, if the name of my business is “Bob Adams” who paints houses, I am not using a fictitious name. But if I am using the name “Bob Adams Painters,” then that is considered a fictitious name because it is not totally identical to my name.

Registering your “doing business as” (DBA) is done either with your county clerk’s office or with your state government, depending on where your business is located. There are a few states that do not require the registering of fictitious business names. Even when it is required, many businesses do not bother to register their fictitious name. The Department of Commerce in Washington, D.C., can give the necessary information for obtaining a license for interstate commerce.

Related: The 300 Best Small Business Ideas

Sole Proprietorship, Income, and Taxation

The sole proprietor’s income from the business is treated as personal income. In the U.S., you can declare this income as part of Schedule C, Profit and Loss from a Business or Profession, with a standard 1040 Federal Individual Income tax return.

You will also need Form 1040ES, Declaration of Estimated Tax for Individuals. The IRS will supply you with vouchers for submission of quarterly estimated tax payments. These payments are made in January, April, June, and September. And, of course, being in business for yourself, you will also have to pay all the required payroll taxes, plus state income taxes (unless you live in one of the few states without income taxes), plus city income taxes (if you live in a city that has it).

Related: What Kind of Legal Structure Does My Small Business Need

The Pros of a Sole Proprietorship

  • You are in business quickly and easily.
  • There are hardly any restrictions and very few forms to fill out.
  • As a sole proprietor, you control all of the money made by the business.
  • You make all business operation calls.
  • You are management and, thus, can respond more quickly to day-to-day changes and decisions.
  • You experience less government control and taxation. You don’t have to keep incorporation records and annual corporate records.
  • You don’t have to do a separate tax return for the business and you don’t have to prepare a balance sheet for the business.

Related: Should I Incorporate or Form an LLC?

The Cons of a Sole Proprietorship

  • As a sole proprietor, you are responsible for 100 percent of all business debts and obligations. This liability covers all of the proprietor’s assets, including his or her house and car. Additional insurance coverage may be needed to cover personal injury or physical loss that may hamper the continuity of the business.
  • The death, physical impairment, or mental incapacitation of the owner can result in the termination of the business.
  • It is typically more difficult for sole proprietors to raise operating cash or arrange long-term financing because they have fewer assets.
  • All the decision-making power rests with one individual.
  • A sole proprietorship appears less professional than a corporation or an LLC.

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Related: 12 Advantages and Disadvantages of a Joint Venture


About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.

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