Key Advantages of Sole Proprietorship
You may have briefly heard about the advantages of sole proprietorship. Is it right for you? Here’s a detailed guide to help you make that decision.
The initial setup of a business can determine a lot about its viability for long-term success. The way a company is structured has massive tax implications, can limit or improve the rate at which it scales, and can be conducive or destructive for business partnerships and cooperative efforts.
Choosing the right setup is just as important as choosing the direction you want your company to go in, the product or service you want to focus on, and the branding you want to commit to.
Among the many ways a business can be set up, one of the most popular for entrepreneurs and smaller startups is the sole proprietorship.
What is a Sole Proprietorship?
Is your business or idea largely a one-person show? Are you going to be doing the majority of the work, with a few key personnel to help you divide the legwork and sell your idea? Do you have what it takes to run a business almost entirely on your own? Then you are likely going to be looking at setting up a sole proprietorship.
Sole proprietorships are the next step for entrepreneurs looking to hire a small team to help them get more done with the 24 hours a day offers. They’re the business type that gives nearly all the power and decision making that goes into running a company to one single individual, while giving that individual the benefits of being their own boss, including control over the profits of the company.
You Are in Charge
Sole proprietorships set themselves apart from corporations, partnerships, or LLCs in that you, the creator of the company, are in charge. And you are in charge alone.
This doesn’t make you infallible – you must answer to the law, meaning that you must respect local, state, and federal labor laws and regularly submit to inspections or questions from local regulatory bodies.
But aside from the very basics of legal and business ethics, you have total control over how your business is run, and every decision your company must make, from naming and branding to production and marketing, sales, hiring, and more.
A Simple Setup
Unlike larger enterprises where liability and responsibility are diffused among a group of people, a sole proprietorship is both simple in structure and setup. Consequently, this means there’s far less paperwork to get into, and far fewer headaches to manage during the early days of the business – at least when it comes to setting up your business structure. Remember, there’s no profit sharing and little documentation.
The bulk of the work will go into ensuring that you’ve got everything you need to legally run your business – i.e. the proper permits and licenses. Sole proprietorships have fewer registration requirements compared to corporations or even LLCs.
Make Your Taxes Easier
If you’re an entrepreneur, then you’re used to being self-employed, and consequently doing your own taxes. If you become the owner of a sole proprietorship, then nothing fundamentally changes tax-wise. Every bit of profit goes directly into your pocket, and translates into personal income.
There is a slight change in the form of some new IRS tax forms for sole proprietorships – Schedules C and SE – but the gist remains the same. What’s more is that you only need to pay taxes on your company’s profits, not your total revenue.
Ideal for Modern Spaces
Sole proprietorships tend to be on the smaller side, which renders them ideal for flexible and hybrid workspace solutions. Setting up a smaller business still comes at a big cost if you decide to lease a traditional office for yourself and your team, especially if you want a business address that signals status and competence.
But by virtue of setting up as a sole proprietorship, you and your team can afford to drastically cut down on the overhead costs of setting up an office of your own by leveraging modern coworking spaces instead.
These allow you to claim an expensive address for your business at the fraction of the cost of leasing the same space all to your own, while benefiting from the pros of working in a coworking space, such as markedly better productivity and cooperative networking opportunities.
Coworking spaces are run by companies that handle the amenities, the space management, and the minute details of keeping the lights on in an office environment, at the cost of a monthly fee from all tenants.
As a sole proprietorship, you will have more than enough to worry about in the early days of running a company. Organizing your team remotely and through coworking spaces allows you to further cut down on the costs and worries that will keep you occupied as you get up off the ground.
Coworking spaces also allow you to work with both hybrid and fully remote team setups. You can finance coworking costs for your employees through the business, providing a professional office set up for each valuable key talent in your company while reaping the benefits of working with talent from throughout the world.
There are Disadvantages
There’s always a downside, and with sole proprietorships, that downside is the direct result of your unanimous control.
While you are entitled to all the profits, you are also liable for losses and debts. And with the power to make every major decision for your business, you are ultimately carrying the burden of responsibility for every choice you make.
And if you employ people, their livelihood will rely on the choices you make, which can add to the weight on your shoulders.
Whether or not you decide to structure your business as a sole proprietorship will have a tremendous impact on your company. As always, it’s generally best to discuss your options with a financial advisor.
It’s not enough to take the basics at face value. How they apply to you is what matters the most. The way your business is set up initially will depend on your individual circumstances as a business owner, and any key advantages or disadvantages will be accentuated or mitigated by these circumstances.