Advantages and Disadvantages of a Sole Proprietorship

A Sole Proprietorship is a type of business entity with a single owner, having the perk of being very simple to start. Just pick a name—yours or a fictitious name (also known as ‘doing business as’), get the licenses you need, and you’re ready to go. Sole Proprietorships also get the advantage of being a ‘pass-through entity,’ which eludes the double taxation you’d get from owning a regular C-corporation. It’s easy, simple, and avoids unnecessary taxes; so why is it that we haven’t recommended it to our past 265,000 clients? Read on to learn the Sole Proprietorship Advantages and Disadvantages

Sole Proprietorship Advantages and Disadvantages

Sole proprietorships are popular among independent contractors, consultants, and other small business owners. A sole proprietorship is not a separate entity from its owner and doesn’t yield to a lot of government regulations. Let’s cover the advantages and disadvantages of starting a sole proprietorship:

Advantages of a Sole Proprietorship:

• Full control of Business; sole owner.

  You alone call all the shots; make all decisions; have the final say, in all aspects of your business.

• Sole proprietor receives all profits.

  As a sole proprietor, all the profits in your business flow directly and solely to you.

• Access to business loans

  Though unincorporated, a Sole Proprietorship is a business entity and has access to business loans. However, you will be personally liable for all debts to creditors.

• Simple and easy to start

  No state filings, no state annual reports, few formalities, less fees; Register a name, get your license, and go!

• Easy record-keeping requirements

  Record keeping is relatively straight-forward when you’re the sole owner and funnel for all income and expenses.

• Being a Pass-through Entity; Better Tax Rates

  Owners of a sole proprietorship don’t have to file both business and personal taxes (read more on taxes below)

Disadvantages of a Sole Proprietorship:

• Unlimited Liability; You May Lose Your Personal Assets

  Unlike a Corporation or a Limited Liability Company (LLC), Sole Proprietorship owners are personally responsible for all debts and claims against their business. If anyone wanted to take legal action against an LLC, they could only sue the business entity, not the owners. A Sole Proprietor lacks liability protection and risks losing their personal assets.

• Taxes (Read more on Sole Proprietorship Taxes below)

  There’s no contrast between personal and business income from a tax perspective. The tax rates for income from a Sole Proprietorship depend on individual tax bracket.

• Hard to Raise Money

  Business Lenders typically prefer to work with ‘limited companies’, partly due to a Sole Proprietorships lack of shareholders, partners, and members. You also can’t raise capital by selling an interest or share in the business. If you need to raise money for your business, check out our services.

Sole Proprietorship Taxes

A sole proprietor reports the earnings of his or her business to the IRS as personal income. You must file Schedule C (Form 1040)—along Schedule SE to determine how much self-employment tax you owe. The IRS requires you to pay unemployment tax for your employees, but not yourself; which unfortunately means that you won’t get unemployment if the business flops.

Sole Proprietorship Tax Rates and Tax Bracket

The tax rates for the income of a Sole Proprietorship will depend on the owner’s tax bracket. For example, if your Sole Proprietorship profited $550,000 after expenses—even if you only paid yourself $100,000—you will still be in the 37% tax bracket, not the 22% (according to 2019 rates). Making you pay more in unnecessary taxes!

LLC vs Sole Proprietorship

The difference between a sole proprietorship and a LLC:

It’s also easier to raise capital as an LLC since lenders prefer working with them over Sole Proprietorships. If you work from home or use personal assets for your business, you could have the LLC lease the home office or other assets from you; enabling you to write off the use of personal assets as business expenses.

S-Corporation vs Sole Proprietorship

Unlike a Sole Proprietorship, an S-Corporation has limited liability; which protects the owner. Like a Sole Proprietorship, an S-Corporation has pass-through tax treatment; avoiding double taxation. However, since a Sole Proprietorship is not a separate entity from its owner, both your personal and business incomes are counted as one towards determining your tax bracket. Unfortunately, this may typically result in a Sole Proprietorship having higher tax rates than an S-Corporation. Costing you money you didn’t have to pay!

Should you start a Sole Proprietorship?

Weighing the Sole Proprietorship advantages and disadvantages, we highly advise that you don’t start a Sole Proprietorship! After helping more than 265,000 clients start, expand, buy and sell businesses—we’ve yet to come across a case where a Sole Proprietorship would be advantageous over the many other business options out there. Spiegel & Utrera, P.A. is a fully licensed law firm that delivers professional legal services at extremely affordable prices.

We recommend that you open up an S-Corporation or an LLC instead. Starting a business with us gets you a complete corporate or company kit along with free legal advice; a package with a price that you won’t find anywhere!