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Disadvantages and Advantages of Sole Proprietorship

navajocodetalkersadmin on June 15, 2015 - 7:07 pm in Pros and Cons

There are many different way to run a business, one of the most popular is a sole proprietorship, mainly due to it’s simplicity. A sole proprietorship is when a business is owned and operated by a single person, making most things much more efficient. It is most attractive to small business owners because of the ease of starting this type of business. While there are many great things to benefit from when using this type of business structure, there are certainly some drawbacks that should be considered as well.

Advantages of a Sole Proprietorship

1. Light Paperwork
Paperwork is an inevitable part of running any type of business. This can be a difficult thing for a new business owner to understand and keep up with, which is why many choose to operate under a sole proprietorship. Tax reporting and management forms are much simpler.

2. Full Control of All Profits
As a sole proprietor you have full control over all of the money that is made by your business. You choose where the money goes to, whether it be yourself, renovations or improvements in your business, or into investment opportunities.

3. Taxers Are Made Simple
With this form of business structure, you are not required to file separate taxes solely for your business. You are able to incorporate all of the money you made and put into your business in your personal tax return.

4. Able To Respond Quickly
You are free from any interference into your business. This allows you to respond very quickly to any problems that may occur or changes to day to day operations as needed. With big business structures, such as a corporation, there are many different levels that must be gone through to make any type of changes.

5. Easiest To Begin
The forms and paperwork that are required to register your small business as a sole proprietorship are very simple. It is the easiest type of business structure to begin, it is also the fastest.

Disadvantages of a Sole Proprietorship

1. Makes a Business Fragile
Since all of the business control lands on a single person, if anything happens to this person the business is likely terminated. It is difficult to transfer control to different people once you are operating underneath a sole proprietorship.

2. A Less Professional Appearance
People are much less likely to place their trust or business in a business operating under this type of business structure. Since only one person is in control, there is a perceived lack of balance in the company.

3. Complete Liability
The sole proprietor of the business is responsible for everything, including all of the problems that could occur. Any legal problems fall on one single person, as well as all debts and other business obligations.

4. There Is No Room To Grow
If there are any plans of future expansion for a business, a sole proprietorship is likely not the best option. This is due to the fact that only one person has the ability to make decisions, leaving no room for anyone else. Other people are needed in order to expand the business or to register as a partnership or corporation.

5. Difficult To Raise Capital
It is highly complicated to find investors into a sole proprietorship business. This can further hinder the growth and development of a business that does truly have potential for immense success.

Important Facts About Sole Proprietorship

  • 7 percent of the United States GPD is made up of the profits made by sole proprietorship’s.
  • Ebay started out as a sole proprietorship in 1995.
  • Other successful companies like Kinko’s and Annie’s began with this type of business structure.
  • A sole proprietorship is the most common type of business structure in the country.
  • It can take as little as 2 and a half weeks to register a sole proprietorship.
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