The Pros & Cons of a Sole Proprietorship & Corporation

You have a few options when figuring out how to structure your business startup. A sole proprietorship and a corporation are two common structures. As a sole proprietor, you operate your business as a self-employed individual. A corporate setup has a more formal structure, and you can take on other investors in the business.

A major benefit of a sole proprietorship is its simplicity of setup and operation. Other than getting any professional licenses or meeting any local business registration requirements, you don't have to file paperwork. In fact, you show your business earnings on your individual tax return using Schedule C for self-employment. As a sole proprietor, you make all of your own business decisions and can integrate your personal and business finances as needed. Some proprietorships require little expense to start up.

A flaw in the proprietorship, which has led many individual business owners to turn to limited liability corporations or S corporations, is its lack of insulation from lawsuits. If your business is sued for damages and you lose, your personal assets are at risk. The courts may seize your assets and garnish your wages to pay your liability. A sole proprietorship also has no capacity to take on private investment. If you decide to get equity financing in the future, you may have to go to a more formal structure.

Corporate owners have their personal finances protected from liabilities of the business. This means that you typically can't lose more than the money you have invested if the business is sued. Corporations have more formal structure, which gives them a more orderly feel and decision-making system. You can take on investors in a corporation to share the costs and risks of going into business.

The legal paperwork and financial record keeping of a corporation are much more stringent than with a proprietorship. You also have to pay the costs of completing the incorporation process, which usually includes filing fees and legal fees. Corporate income is often double taxed. The business itself has a tax obligation on earnings, and owners pay taxes on the income they receive from their shares. Corporate structures can also lead to more bureaucratic operations and less timely decisions.