What Type of Business Should Operate as a Sole Proprietorship?

A sole proprietorship is undeniably the easiest, lowest-costing entity to form and manage.  Here are some of the advantages of a sole proprietorship:

1. Simplicity – This is by far the least complicated type of entity to form and administer.  If you have no employees, the only form you need to file with the IRS is Schedule C on your 1040 tax return.

2. Low costs of formation – It  may not cost anything to begin operations as a sole proprietor, unless you wish to have employees.

3. Control – Since there can only be one owner of a sole proprietorship (you), there is no hassle with other owners or partners.

4. Flexibility – A sole proprietorship is easy to sell or to end.

5. Great tax benefits – As the owner of a sole propriertorship, you are entitled to the many tax benefits of operating a small business.

Unfortunately, along with the ease and simplicity of operating as a sole proprietorship come the following disadvantages:

1.  Unlimited liability – This is undoubtedly the sole proprietorship’s greatest disadvantage.  If you are sued for any business problem or if your business incurrs any debts, you are personally liable.  Therefore, if there is any chance someone could sue you, if you have any employees, or if you have substantial assets to protect, you should definitely not operate as a sole proprietor. 

2. No managerial oversight – By definition, a sole propriertorship has only one owner.  So, there is no partner or board of directors to provide business advice about decisions.

3. Difficulty raising money – A sole proprietor generally has more trouble securing loans for the business, since the owner’s assets are collateral.

4. Low stability – if the owner dies or becomes disabled, there may be no one else who could run the business.  Therefore, the business could end abruptly at any time.

Overall, a sole proprietorship is wonderfully simple to begin and to operate, but the unlimited liability potential can outweigh these benefits.  The only people who should consider this entity for their business are those who have almost no possibility of liability problems, no employees and few assets that need protection. 

Probably those who would benefit most from this choice of entity are people with a home-based businesses, like network marketers or free-lance writers.  However, if your tax accountant or attorney feels that you should chose another entity, you should take his or her advice.


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