Advantages and Disadvantages of Sole Proprietorship

Advantages and Disadvantages of Sole Proprietorship

Feb 03

There are six types of business organizations (based on federal tax purposes) that the U.S. federal government recognizes:

  • Sole Proprietorship, which is a business owned by a single person, is also called a consultant, independent contractor, or freelancer;
  • C-Corporation
  • S-Corporation
  • General Partnership, which is formed with two or more partners as business co-owners.
  • Limited Partnership, which is a partnership formed by two or more people. It has at least one general partner and one limited partner:
  • Limited Liability Company (LLC), which is a hybrid between a partnership and corporation.

Each type of organization is designed to suit every entrepreneur’s specific needs, which include his/her intended type of service, future plans for growth and, most importantly, the type of limited liability protection desired (limited liability protection is one of the major considerations when it comes to a firm’s legal concerns. It limits the owner’s/shareholder’s amount of financial liability to the amount of capital he/she has invested, saving whatever personal assets he/she has).

Each organization also has its own advantages and disadvantages, especially where profit, management and legal matters are concerned. One specific type of business organization is sole proprietorship, a type of firm that is owned and run by only one person. Sole proprietorship is the most widespread form of business entity in the United States, making up about 73% of all firms in the nation.

Advantages of sole proprietorship

  • Though the smallest form of business entity it can earn the highest profits and, since the business and its owner are taken as just one entity, one tax payment satisfies the federal tax law
  • required;
    Sole proprietorship is also easy to start and much easier to manage (as there are no clashing of interests, which can happen when there are more owners);
  • Ensures faster and greater flexibility in making decisions;
  • Whenever an owner decides to end operations, all he/she has to do is close shop and settle whatever bill needs to be paid.

Disadvantages of sole proprietorship

  • Liability of the owner is unlimited, meaning, creditors can run after the owner’s personal assets, not just the capital he/she has invested, in payment of debts;
  • Since there is only one owner, the amount of capital to start a business may, thus, be limited, affecting the stock inventory and number of qualified or competent employees needed to run the business efficiently;
  • The owner may also have limited managerial skills, which can limit the firm’s growth, plus, the business is sure to end the moment the owner decides to sell it, quit or dies

The law firm Russo, Russo & Slania, P.C., says, “Every business has unique needs, and different business models may be more appropriate for different types of company. With the guidance of a knowledgeable and experienced business attorney, you can rest assured that the decisions you make will set your company up for future success.