A sole proprietorship is a type of business structure where a person, referred to as a sole proprietor, is the sole owner of the business. While the sole proprietorship may have a business name, there is usually no legal distinction between the sole proprietor and his/her business. There are definitely several advantages associated with this type of business arrangement, but there are also disadvantages. Whether this type of structure is right for you just depends on your situation and your goals.
Advantages of a Sole Proprietorship
There are four main benefits to a sole proprietorship. These include:
- No registration requirements: Unlike with a structure like an LLC or a corporation, you do not have to file anything (like Articles of Incorporation) with your state in order to register a sole proprietorship. You basically become a business entity by the mere act of doing business.
- Tax benefits: Sole proprietors don’t have to file separate tax returns for their businesses. Sole proprietorships are taxed as pass-through entities, meaning a business’s income and losses are reported on the sole proprietor’s personal tax return.
- Easier banking: Sole proprietorships don’t require a business checking account in order to do business. Sole proprietors can make and accept payments using their own personal bank accounts.
- More straightforward business ownership: Sole proprietors are their own business managers. They don’t have to worry about company officers, managing members, or boards that are usually associated with other business entities.
Disadvantages of a Sole Proprietorship
There are three main disadvantages to a sole proprietorship. These are:
- No liability protection: Since there is no legal distinction between a sole proprietor and his/her business, a sole proprietor can be held personally liable for legal, financial, and tax issues.
- Difficulties getting financing and business credit: Sole proprietors may run into difficulties with securing loans or financing. This is because most lenders and banks want to work with more established business entities since they have a more reputable credit history.
- Difficulties in selling the business: It’s often difficult to sell a sole proprietorship because it is not a separate entity from the sole proprietor. A sole proprietorship often ends upon the operator’s death or his/her decision to close the business.
What’s Right for You?
If you are starting a new business and contemplating running it as a sole proprietorship, you need to weigh the pros and cons and think about your particular situation and business goals. Ask yourself the following:
- Do you want a more fluid way to do business with less paperwork and registration obligations?
- Do you want total control over all business decisions?
- Do you like the idea of going it alone without any partners, managers, officers, etc.?
- Are you okay with not having any liability protection?
If you answered “yes” to these questions, then a sole proprietorship is likely best for you and your business. But if you answered “no” to some or all of them, then you’ll want to research into other types of business entities, like a:
- LLC,
- Partnership,
- Corporation, or
- S-Corporation.
Contact The McWilliams Law Group for Help
When you are ready to open a new business or take your current business to the next level, the lawyers at The McWilliams Law Group are here to help. We can help ensure that your operations provide you with the tax and liability protections that best fit your short- and long-term plans. Our attorneys work closely with business owners throughout Washington and California, providing individualized and strategic advice to help their businesses run smoothly. Contact us now and get the skilled business advice that you deserve.
