Advantages and disadvantages of sole propreitorship/self employed

Sole Proprietorship

A sole proprietorship is the most simplest form of business structure.  It is also the easiest to start. As you are the sole owner of the company, you are fully responsible for the success or failure of the business. Any profits you generate will pass through the owner and so would the losses. The owner of the business will be responsible for the business debts if the business is unable to generate any profits. This is the easiest to start and can be started with low capital for simpler service businesses like business consulting etc.

 In fact, most small businesses start out as a sole proprietor. Once they start generating revenues and when ready to start raising more capital, they change their entity structure to a more organized form like LLC, INC and register themselves as either an S or a C Corporation.

As a sole proprietor, if you do not wish to use your real name, you can register a DBA with the state you reside in.

 DBA registration process is very simple and most states allow you to be registered as a doing business as (DBA) in 1-2 days or earlier based on processing times.

 As a sole proprietor, you need to pay self-employment taxes due each quarter and file a Schedule C end of the year along with your personal tax returns. It’s a relatively simple process and IRS has made it very easy for business owners to either pay self-employment taxes via their EFTPS website or can be paid via credit card.

Advantages of a Sole Proprietorship:

• All profits will pass through to the single owner of the business.
• Easy to start and setup as there are minimum filing requirements.
• Less paperwork is involved for startup.
• The owner can take independent decisions on the future of the business and key decisions.
• No double taxation as in corporations. The owner pays taxes based on the profits generated and this pass through his personal tax returns.

Disadvantages of a Sole Proprietorship:

• The owner is fully responsible for business debts and liabilities incurred by the owner. The owner may be personally held responsible for any tax debts, business debts which may be unpaid by the business. Therefore, careful consideration needs to be made before starting your business as a sole proprietor.
• Scalability of the business is limited as there is limited capital available from the owner’s personal funds or from borrowed funds granted to the owner. This may limit the growth of the business.
• Succession planning may be a serious concern. Upon the death of the owner, the business will be terminated and will not continue unless proper transfer procedures are followed to be passed on to the heirs. Upon transfer, to family or heirs, a brand new business/sole proprietorship is created.

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Posted In: Company Formation

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