The most common and simplest form of business is a sole proprietorship. An individual proprietor owns and manages the business and is responsible for all business transactions. Most freelancers, independent contractors and some salespeople who work on commission are set up as sole proprietorships and are personally responsible for all debts and liabilities incurred by the business. This business structure is the easiest to form, but comes with some downsides.
Here are the advantages to sole proprietorships:
- Complete control: A sole proprietor has complete control and decision-making power over the business. He or she doesn't need to check with a board of directors or shareholders before making a pricey purchase or sealing a big deal.
- Time is on your side: Because there are fewer legal restrictions on this form of business, sole proprietorships can get started quickly. Plus, a sole proprietor can own the business for any length of time and sell it whenever and for whatever price he or she wants. As owner, a sole proprietor can even pass a business down to his or her heirs.
- Taxes: In a sole proprietorship, the company does not pay business taxes. Instead, the owner pays taxes on income from the business as part of his or her personal income tax payments.
- Less paperwork: Although sole proprietors do need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances, the paperwork and other formalities are substantially less than those that affect corporations.
- Lower cost: There are minimal legal costs involved in forming a sole proprietorship and fewer government filing fees.
However, there are also some important disadvantages of sole proprietorship:
- Personal liability: Without the protection of a corporation or LLC structure, a sole proprietor of a business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. Even if the business files all the applicable forms under the fictitious name or under doing business as (DBA), it does not mean that the business is a separate entity from a legal standpoint.
- Decisions, decisions: All responsibilities and business decisions fall on the shoulders of the sole proprietor. Sometimes it's hard to trust your instincts when your whole business is on the line. Sole proprietors usually find solace in joining networking groups or working with a mentor so they can get some feedback and guidance.
- Attracting investors: Because sole proprietorships are seen as a riskier investment, it may be harder to convince venture capitalists and other investors (or even bankers) to take a chance on your business.