Sole Proprietorship Explained: Pros and Cons

Sole Proprietorship Explained: Pros and Cons

What is sole proprietorship? It’s a type of business enterprise that is owned by one individual. One person is responsible for the entire business, and there is no legal difference between the owner and the business itself. If you’re going into business as a sole proprietor in California, you may need a California seller’s permit verification to openly sell your products.

That’s just one of the things to keep in mind when considering a sole proprietorship: You must be knowledgeable when it comes to a variety of topics, including sole proprietorship taxes, proper documentation, and permits, etc.

Yet, there are many advantages of sole proprietorship to consider. By taking a closer look at some sole proprietorship pros and cons, you can make a more informed decision on what business model is best for your future enterprise.

How Is a Sole Proprietorship Different from Other Business Models?

A sole proprietorship is by far the most popular type of enterprise, but it can also be confusing to fully understand. It’s owned by one person, and that person may even use their legal name as the name for the business.

The biggest difference is that there is no separate legal entity from the business and the person who runs it. The owner is in charge of all the assets and they reap all the benefits—but they also take on all the risks by themselves.

What Are the Advantages of Sole Proprietorship?

There are many benefits to enjoy when you set up a sole proprietorship instead of something like an LLC or bigger corporation. Some of the most notable advantages include:

  • It’s easy to set up. You don’t have to work with a separate business name, so there is very little paperwork involved in developing a sole proprietorship. It’s also the least expensive type of business model to set up. Even someone with limited resources can start a sole proprietorship and turn it into a successful business.
  • You’re in charge! One of the biggest benefits of a sole proprietorship is the flexibility in management. You make all the decisions, and you don’t have to go through other people like a board of directors in order to get things done. A sole proprietor also has the benefit of getting all the profits from the business, without having to split that income with other partners.
  • There are fewer regulations. Corporations have many underlying rules they must follow from the government in order to do business. As a sole proprietor, you don’t have to worry about submitting mountains of paperwork to the government on a yearly basis.
  • It’s easier to file taxes as a sole proprietor. This is because your identity and your business are one and the same. So, only one tax return must be filed. That will allow you lower tax rates since you’re filing as an individual instead of a corporation.
  • You won’t have to keep as many records. There are no separate books involved for various partners or stakeholders. You don’t even necessarily have to hire a bookkeeper or accountant if your business is small enough to do those things on your own. It’s much cleaner, with much less paperwork involved.

What Are the Disadvantages of Sole Proprietorship?

While there are many benefits of a sole proprietorship, there are also some cons to consider. The biggest disadvantage is the risk you’re taking when you run a business by yourself. While you can enjoy the profits as they come, you’re also left to deal with all the losses if your business doesn’t succeed.

A sole proprietor doesn’t have protection from liability, as a larger corporation does. If your business is unable to pay off its debt, creditors may come after your personal belongings and assets.

Other notable disadvantages to keep in mind include:

  • The uncertainty of the life of the business if something should happen to you
  • Difficulty appearing as a legitimate business
  • Difficulty raising funds to support your business
  • Limited resources

Another disadvantage of being a sole proprietor is having to carry the burden of all the business decisions. For example, if you run a company that sells custom-made sneakers, it’s up to you to come up with the designs, price points, extra features, etc. There’s a good chance you might have talent and skills in some of those areas, but not all. As a result, your designs could start to become outdated. Or, you could be missing out on thinking of special features your customers would enjoy.

By not having other people to bounce ideas around with, you’re limited in your business view, which can end up hurting you in the long run.

What Are the Disadvantages of Sole Proprietorship?

Should I Start a Sole Proprietorship Business?

Starting a business on your own is always an exciting venture, but deciding which structure to follow can be confusing. Now that you’ve seen some of the pros and cons of starting a sole proprietorship, you can decide whether it’s the right option for you.

No matter what you decide, you shouldn’t have to stress over your business filing services. Contact us at FastFilings for seller permits and the business licensing required for the state of California. It’s the best way to start your new enterprise off on the right foot.

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