Sole Proprietorships: Advantages and Disadvantages

Many small businesses in the United States operate as sole proprietorships. In fact, this is the most common type of business and is business in its simplest form. In this article we will discuss some advantages and disadvantages of sole proprietorships and more specifically, owning and operating a sole proprietorship in California.

Advantages of Sole Proprietorships

· Low start-up cost. Since there is no legal distinction between the person and the business entity, the sole proprietor is not required to register as a legal corporation. This saves on filing costs. Here in California, there is also a high minimum tax which sole proprietors avoid.

· No business taxes. Income generated through the business is reported and paid on the sole proprietors’ personal income taxes.

· No annual compliance. Unlike corporations, sole proprietors are not required to pay annual fees to retain their legal status.

· Simplicity and speed of setting up your business. While starting a sole proprietorship, LLC or corporation requires compliance with licensing, local laws and regulations, individual owners of sole proprietorships have lower overhead costs and speed though the process.

Disadvantages of Sole Proprietorships

· Personal liability. Since the business is not legally separate from the owner, the owner is personally responsible for all debts and transactions.

· Fewer investment opportunities. Once an investor or partner has joined the business, it is no longer a sole proprietorship. The transformation of the company will require compliance with licensing requirements and filing fees. As a result, it may be hard to find an investor to back your company.

· Debt. Many sole proprietors have dipped into personal assets or acquired loans to start their company. Since a sole proprietorship is not a formal business entity, personal loans may impact the owner’s credit score.

Is a sole proprietorship the right decision for you and your business? Your team here at Structure Law Group would be happy to help you start your sole proprietorship or answer any questions you may have. You can find more about the services we offer here.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.