Pros & Cons of Being a Sole Proprietor: Top 10 Things to Consider

If you’re an aspiring business owner considering whether or not to become a sole proprietor, then you’ve come to the right place. Starting your own business can be an exciting and rewarding experience! However, it is important to weigh all of the potential pros and cons before taking this step, as there are many things that need to be thoughtfully considered.

In this guide, we will take a look at 10 of the key factors you should keep in mind when deciding if setting up as a sole proprietor is the best move for you and your business. By exploring these components together, hopefully, we can help guide your decision-making process so that by the end of it know exactly what works best for you!

What is Sole Proprietorship?

A sole proprietorship is a business structure owned and operated by a single person. It’s the simplest business structure, as there are no formal requirements for setting up or operating the business. 

Sole proprietorships are common among small businesses and entrepreneurs, as they offer flexibility regarding ownership and control.

Sole proprietorships differ from other business structures in that they do not protect the owner from personal liability for debts or obligations incurred by the business. 

If the company fails, creditors can come after the owner’s assets to recoup their losses. Sole proprietorships also have fewer tax benefits than other types of businesses, such as corporations or limited liability companies (LLCs).

Related Reading: What is the Difference Between an LLC and Sole Proprietorship?

Pros of Starting a Sole Proprietorship

Starting a sole proprietorship is an attractive option for many entrepreneurs. It is a great way to start a business without investing too much time, money, or effort. Sole proprietorships offer several advantages that make them an attractive option for entrepreneurs.

Here are some of the major advantages of starting a sole proprietorship:

Simple and easy to set up

Setting up a sole proprietorship is easy and inexpensive. There is no need to file any paperwork or go through any formal legal procedures to start the business. 

Fewer Legal Obligations

Sole proprietorships have fewer legal obligations than other business structures, meaning they're easier to manage and maintain.

Complete control

As the business's sole owner, you have full control over all decisions and operations. This can be seen as a pro or a con (depending on who you ask). Some people do not enjoy making all business decisions and prefer to work with others.

Tax advantages

Sole proprietorships offer tax benefits such as deductions on business expenses which can help reduce your overall tax burden. A sole proprietorship is considered a pass-through entity, meaning the business income and expenses are reported on the owner's personal income tax return. This can result in lower tax rates and fewer tax filings.

Flexible

A sole proprietorship can be easily dissolved or changed to a different business structure if needed. This is one of the most desirable attributes of sole proprietorship; you have more flexibility within your business.

Total Profit

Since you own the entire business, you get to keep all profits generated and don't have to share it with anyone else. What could be better?

Cons of Starting a Sole Proprietorship

While there are upsides to a sole proprietorship, naturally, there are drawbacks. Here are some of the setbacks to operating a sole proprietorship.

Unlimited personal liability

The most significant disadvantage of a sole proprietorship is that the owner is personally liable for all debts and obligations of the business. This means that if the company incurs any debt or faces any legal action, the owner's assets may be at risk.

Limited access to capital

As a sole proprietor, it may not be easy to obtain funding from banks or investors. This can limit the growth and expansion of the business.

Limited management and expertise

As the business's sole owner, you may be limited in management and expertise. It may not be easy to handle all aspects of the company, such as marketing, accounting, and human resources, on your own.

Lack of continuity

A sole proprietorship is tied to the owner's life and may not continue after the owner dies or becomes incapacitated. Having one owner can mean the livelihood of that individual entirely dictates the direction (or ending) of a business.

What are the Legal Requirements for Setting Up a Sole Proprietorship?

A sole proprietorship is a great way to start your own business. While there are no legal steps you need to take to set up your sole proprietorship - there are a few legal requirements you can consider. The legal requirements for a sole proprietorship can and will vary depending on the country or region where you plan to establish your business. 

Let's look at some general requirements that you can consider before starting your sole proprietorship:

Business Name Registration

If you plan to operate your business under a name other than your legal name, you may need to register your business name with the appropriate government agency. In some places, this is known as a "Doing Business As" (DBA) registration.

Business License

Depending on the type of business you plan to operate, you may need to obtain a business license or permit. These licenses or permits are usually issued by the local or state government and may be required for health and safety reasons.

Zoning and Land Use Permits

Depending on the location of your business, you may need to obtain permits or approvals for zoning or land use from the local government.

Insurance: Depending on the nature of your business, you may need to obtain insurance to protect your business and yourself from liability.

Employer Identification Number (EIN)

To hire employees, you must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).

It's essential to research the specific legal requirements for setting up a sole proprietorship in your area and consult with a lawyer or accountant to ensure you have met all the necessary legal obligations.

How to Make Sure Your Business is Set Up Properly as A Sole Proprietor

The day you start conducting business is the day you can consider yourself a sole proprietor. But as noted above, you may want to make sure you are conducting your business legally and obtain any additional licenses needed.

Additionally, it is important to understand the tax implications of being a sole proprietor so that you can plan accordingly. By taking these steps, you can ensure that your business is set up correctly and compliant with your local and federal laws to operate as a sole proprietor.

We recommend you look over the list of pros and cons and decide what is suitable for you and your business ventures. It’s a big decision with lots of reward. 

Business Structures to Consider Other Than a Sole Proprietorship 

When it comes to starting a business, many business owners opt for a sole proprietorship because it is the simplest and most cost-effective way to get started. However, there are other business structures that can offer additional benefits and protections.

One option is a limited liability company (LLC), which provides personal liability protection and allows for flexible tax options. Another option is a corporation, which offers even greater liability protection and the ability to sell shares of the company. Lastly, partnerships allow for shared ownership and profits between two or more individuals. It's important to consider which business structure is best for your specific needs and goals, but know that there are options beyond a sole proprietorship.