Advantages and Disadvantages of a Sole Proprietorship
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A sole proprietorship refers to a very simple business structure where one person acts as the owner and the operator of a given business or enterprise (Sitarz, 2005). The sole proprietor takes responsibility for all the aspects of his business while reaping all the profits generated from his business. Since there is no legal distinction between the operator and the business, Sitarz (2005) adds that the operator takes up direct control of all the proprietorship’s activities while remaining accountable for all the business debts. Other business models include limited liability companies (LLC), corporations and varying partnerships, among others. A sole proprietorship differs from these other business models in the sense that while a sole proprietor remains solely responsible and in charge of all the business activities, the responsibilities in other business models are shared between different persons or stakeholders (Sitarz, 2005). Moreover, Sitarz (2005) adds that in an LLC, the financial responsibility is a liability of the LLC, while in a sole proprietorship, the proprietorship is held liable. Like any other model, a sole proprietorship has its advantages and disadvantages, as discussed below.
The Advantages of Sole Proprietorships
First, compared to other business structures, starting up a sole proprietorship can be described as an easy task because it requires less time and paperwork. Moreover, a sole proprietorship tends to be cheap to start compared to other business models that require high fillings and fees to start (Niziołkiewicz, 2019). This fact makes sole proprietorships affordable models develop and maintain.
Another advantage of a sole proprietorship is that it enjoys some tax benefits. Instead of a business having to file tax returns, a sole proprietor claims its business loses or gains from its owner’s tax returns (Niziołkiewicz, 2019). Moreover, individual income tax rates are used to tax sole proprietorship instead of corporate tax rates, which allows the business to have a cheaper and simpler task to comply with its tax obligations (Niziołkiewicz, 2019).
Finally, in a sole proprietorship, the owners tend to have direct and complete control over all the business decision making process. Since the owner of the sole proprietorship is the business, it implies that the owner can make all business decisions instead of having to share this responsibility with a corporate board or partner (Niziołkiewicz, 2019). As such, the owner enjoys the freedom to take the business in their desired direction.
Disadvantages of Sole Proprietorships
A disadvantage to a sole proprietorship is that the owners take full liability. This implies that in situations where business debts have become overwhelming, the finances of the proprietor are impacted directly (Niziołkiewicz, 2019). Additionally, Niziołkiewicz indicates that if a sole proprietorship is unable to pay its debt obligations, the owner’s assets are at risk of being seized to service these debts.
Another disadvantage is that the continuity of a sole proprietorship business ends with the departure or death of its owner. This means that the owner’s assets or money from the proprietorship are subjected to inheritance, which can have a significant impact on the employees of the sole proprietorship (Niziołkiewicz, 2019).
Finally, sole proprietorship tends to have a difficult time raising their business capital. The initial startup capital is often from the business owner’s pocket because they cannot be able to issue any stocks or other forms of investment income (Niziołkiewicz, 2019). Moreover, Niziołkiewicz adds that this business model can also find it very difficult to obtain loans, especially if the business owner lacks enough credit score to secure any additional business capital.
References
Niziołkiewicz, M. (2019). Transforming a sole proprietorship into a limited liability company – selected tax aspects. Roczniki Administracji I Prawa, 2(XIX), 309-321. DOI:10.5604/01.3001.0014.0446
Sitarz, D. (2005). Sole proprietorship: Small business startup kit.
