What Are the Strengths & Weaknesses of a Sole Proprietorship?
A sole proprietorship is a business started and owned by an individual. Little or no legal paperwork is required to begin, other than any necessary professional or local business licenses. Operating as a sole proprietor is one of several common options to start your business. You have to consider its pros and cons to decide if it is your best approach.
A sole proprietorship is the simplest form of business establishment. It is the only prominent way to start a business without going through any significant legal hoops. You don't have to file business registrations, unless you want to operate under a fictitious name. You don't even have to set up separate bank accounts for your business, since the income your business earns is considered personal self-employment income. You do need to keep records of your earnings, so having separate accounts is a wise move. You can purchase supplies and products as you see fit and charge whatever prices you choose
If you do your own taxes each year, operating a sole proprietorship may still allow you to do so. A sole proprietor's income is treated as individual income, so you can record it on Schedule C of your federal tax return. If you earn a lot of income through your business or have complex accounting records, you may want to hire an accountant. However, you only have to pay to file one return. Another tax advantage is that your income is only taxed once. Typically, with other business setups, company income is taxed and you take out taxes from your personal share of the profits.
While the nature of your business may dictate a need for more funds, some people start a sole proprietorship for no more than a few hundred dollars. If you operate a service-oriented business out of your home, you have no additional building costs and minimal supply needs, other than equipment for your service delivery. You don't even need to put up a certain amount of money to get started, which is often not the case with a partnership or corporation, where all owners pitch in a portion of startup funds.
The most significant weakness of a sole proprietorship is that it leaves the owner personally responsible for all facets of business. If someone is injured at your office or while you conduct business and he sues you, your personal financial assets could be at risk. Similarly, if someone does contract work on your behalf, you could face civil damages in a lawsuit. This particular weakness is why some individual owners opt for a limited liability company. While it requires more legal paperwork and setup, it does insulated owners from as much personal liability risk. You must also take out loans yourself to fund your business.
While you might love the autonomy of operating a business yourself, you don't get the same level of expertise and input you would from a corporation or partnership. Some people prefer to go into business with others because they each bring different strengths and experiences to the table. Operating alone, you have to consider the management, finances, marketing, service and supplier-relationship needs of your business. You can hire a CPA or consultants, but you have to pay for these services.