The sole proprietorship is the simplest, most efficient, and flexible form of business enterprise. Most business will start out as a sole proprietor ship and the later develop into a partnership or a corporation. A sole proprietorship is owned by one individual, usually the business owner, who makes all of the business decisions. The biggest draw is that setting up this type of business structure does not require much formal organizational or legal procedures.
Advantages of the Sole Proprietorship
- simplicity—Establishing a sole proprietorship requires less formality and fewer legal requirements. It needs little government approval or formal organizational procedures. A sole proprietorship is not required to get a separate tax identification number or to file separate taxes.
- sole ownership of profits—The sole proprietor is not required to share profits with anyone.
- flexibility—A sole proprietor and single owner is able to make decisions quickly and to respond swiftly to business needs. New opportunities and new areas of business can be quickly acted upon, never needing to get approval or even talk with anyone else.
- freedom—The simplicity of the sole proprietorship allows relative freedom from bureaucracy, government control, and special taxation issues. You have the ability to schedule hours of business operations as well as personal time that best suits his or her needs and objectives.
Disadvantages of the Sole Proprietorship
- liability—The sole proprietor has full responsibility and complete liability for all of the obligations of the business, including debt, payables, and judgments.
- losses—While the sole proprietor is entitled to all of the profits, you must also bear all of the losses. Profits and losses are usually cyclical, and you must prepare in years of profit for those years of losses.
- less available capital—As a rule, the sole proprietor has less available capital and options in which capital can be obtained. It becomes harder to establish long term financing, which may be needed to expand your business. Your personal credit history and personal assets are always at risk with capital needs.
- instability—Business succession planning for the continuation of the sole proprietorship at the death of the owner is severely limited. In fact, it will usually terminated at the death of the owner.
- tax benefits—The sole proprietor does not enjoy some of the tax benefits that a corporation form of enterprise does, especially in the area of employee benefit planning and advanced planning strategies.