Pros and Cons of Sole Proprietorships

A sole proprietorship is a great solution for so many people, it’s no wonder that many U.S. businesses are sole proprietorship businesses. That said, there are both pros and cons to consider when trying to establish a business and deciding whether or not a sole proprietorship is the best avenue.

Pros of Sole Proprietorships

Here are some of the benefits of a sole proprietorship.

Easy to start. A person does not, generally, need to take any legal steps to form a sole proprietorship. There’s no need to register with a governmental authority, and there aren’t any major hoops to jump through. Aside from a potential license or permit that may be needed, depending on the state and type of business, there’s very little paperwork, which is going to help get a business moving faster.
Tax deductions. Another major benefit of a sole proprietorship is the tax benefits, specifically the tax deductions. Any income that is generated from a pass-through business is only subject to a single layer of income tax, and some businesses even qualify for a 20% tax deduction of qualified business income. A lot of money can be saved as a sole proprietor by taking advantage of these tax deductions, especially under the Tax Cuts and Jobs Act (TCJA) from 2017 that runs through 2026.
Few government regulations. There is lots of flexibility since there are few regulations for sole proprietors. It’s important to keep proper records, file, and pay taxes timely based on the business income.
Full management control. A sole proprietor oversees and manages all aspects of the business, so there is total control over the operations of the business and how money is received. A sole proprietor can run all of the business finances through a personal checking account.
Can easily be shifted into LLC. Another big bonus to being a sole proprietor is that if the business grows, it can easily be transitioned into an LLC. A sole proprietorship is a natural jumping-off point to creating a larger and more lucrative business if that’s the right direction.

Cons of Sole Proprietorships

Despite some exciting advantages, a sole proprietorship is not without its limitations. Here are some of the potential drawbacks to consider, too.

Liabilities. With all of the freedom and control that comes with being a sole proprietor and getting all of the profit, the sole proprietor is also responsible for any of the business’s debts and actions. This means all debts and other obligations are on the proprietor and no one else. If a business takes an unfortunate turn and the sole proprietor is unable to pay the debts, creditors could go after personal assets since there isn’t that separation between personal and business financials.
Limited resources/capital. Also, keep in mind that it is a sole proprietor’s resources and credit qualifications that are taken into consideration when creating a lending relationship with financial institutions like banks. As such, shares or interest in the business can’t be sold to raise money, so there are some limitations.
Limited value in terms of selling the business. Because a sole proprietor business is typically so niche in finances and design, it isn’t always possible to sell the business. Business assets as a sole proprietorship are personal assets since the business is not a separate legal entity.