Sole Proprietorship: Advantages & Disadvantages
What is a Sole Proprietorship?
A sole proprietorship is the most common and easiest form of all the business structures because to create one, all you need to do is simply start conducting business. This is because under the law, a sole proprietorship as an entity is the same as the person who owns it. That means that you and your business are considered to be the same person. A sole proprietorship can only be owned by one person – the sole proprietor – and no one else.
You can name your business using your own legal name or you can create your own name for your business. If you decide to create your own business name and not use your legal name, then you will need to file for a fictitious business name (FBN). For example, if the name of your business includes your own legal name, such as “John Smith’s Fishing Shop,” you do not need to file for a FBN. However, if the name of your business does not include at least your legal last name, such as “The Best Fishing Shop,” then you will be required to file for a fictitious business name through the county you are operating your business in. Keep in mind that a fictitious business name is the same as a DBA (doing business as), except in California a DBA is called a fictitious business name.
Also, keep in mind that if the name of your business suggests that there are additional owners of the business, such as “Smith & Sons Fishing Shop,” you will have to file for a fictitious business name. The advantages and disadvantages of a sole proprietorship are shown below.
Do I Need A Business License As A Sole Proprietorship?
Although you do not need to create or file any additional business documents to become a sole proprietorship, you will need to obtain a business license in the city that you are doing business in. You can find out how to obtain a business license by going to your city’s website’s business section. Check out http://www.calgold.ca.gov/ to find out whether your business will need to obtain additional licenses or permits to do business.
Advantages of a Sole Proprietorship
Simple to form – do not need to create or file any business documents (will need a business license to operate though)
Inexpensive – no costs to create or file any business documents (except for a business license)
You solely own the business – As the sole owner, you have the right to receive 100% of any profits and you have full control over how your business operates
Flexibility to conduct business in other states – In general, you can conduct business in other states without having to file for a separate registration to do business in those states
No double taxation (flow through taxation) – your business as a sole proprietorship is not taxed; instead, only you as the owner of the business is taxed on the profits your business makes on your personal income tax form
This is different from a corporation where the corporation will have to pay a business tax for simply operating as a corporation and additionally, each shareholder will have to pay taxes on their own income tax forms
Disadvantages of a Sole Proprietorship
No limited liability – limited liability does not apply to sole proprietors, which means you are personally liable for all of your business debts and actions
If there is not enough money or assets in your business to pay off any debts or court judgments against it, then your personal assets (such as your car, house, T.V., computer, and anything of value) can and will likely be used to pay off the debts of the business
Limited initial financial resources to operate the business – the money you have set aside for your business is the only money the business has to operate and if you seek any business loans, your personal creditworthiness will be used to determine your eligibility
Difficult to sell business later as there can only be one owner of the business – there cannot be any partners and you cannot issue any shares like a corporation to investors
The business stops when you do – the business stops operating when you do not take the time or effort to operate it; also, your business will terminate upon your death
Costs of a Sole Proprietorship
Business License/Permits - check out http://www.calgold.ca.gov/ to know exactly what licenses and permits you need to obtain to conduct business in your particular city and county
Fictitious Business Name, if applicable
Obtaining an Employer Identification Number (EIN), if applicable
Intellectual property protection, such as registering the name of your business as a trademark or registering any copyrights or patents your business may have
*The above article is for general informational purposes only and should not be taken as legal advice. Please contact a business lawyer to find out how any information here applies to your particular circumstances.