Sole Proprietorship Advantages | It Pays to Be a Freelancer
There are many sole proprietorship advantages and disadvantages. Today, we’ll quickly define and talk about the simple aspects to a sole proprietorship.
What is a Sole Proprietorship?
A sole proprietorship is the simplest business structure you can create. In fact, you don’t actually have to do anything to create one. Simply by being an individual who runs a business, you are technically a sole proprietor.
You may think that a sole proprietorship is too basic and lacks substance–but many well-known and great companies started as sole proprietorships!
What are the main Sole Proprietorship advantages?
Simplicity:
The main sole proprietorship advantages come in the form of simplicity. You may be wondering how to start a sole proprietorship, but you actually don’t have to do anything. You don’t need to get bogged down with paperwork, registration, fees and other administrative tasks in other business structures.
Unless you intend on operating under a different name (Doing Business As, or DBA), or want to create a separate entity, a sole proprietorship requires no extra steps (with the exception of special industries that require licenses and permits like selling food & alcohol).
Complete Control:
As a sole proprietorship, you have no other stakeholders or partners that have a say in how you operate your business. This means that you can retain full control over your business without getting buy-in from others. Having complete control over your business means you can focus entirely on growth and critical aspects of management.
Tax Advantages:
Another advantage of being a sole proprietorship is the simplicity of taxes. Unlike other business structures where you may have to file separate taxes for the entity, a sole proprietorship acts as a “pass-through” entity. This means that all the profits your sole proprietorship makes will be treated as if you made the income and thus “passing through” the business.
Tax Deductions for the Self Employed:
As a self employed individual, you can get certain tax deductions that regular employees may not have. Here are some common deductions:
Telephone, internet and utility expense you use for business purposes
Software expenses like Adobe, Microsoft Office, Figma, Shopify, etc.
Standard mileage deduction if you use your vehicle for business purposes
Rent for office, or a portion of home rent strictly dedicated to office use
Office supplies like small furniture, printers, electronics
Disadvantages of a Sole Proprietorship
The main disadvantages of a sole proprietorship is that it offers no protection for the business owner/freelancer. In the event that something goes horribly wrong, the owner/freelancer is liable for things like damages, unpaid wages, medical bills, etc. If you want to protect your personal assets, it is a huge disadvantage to operate as a sole proprietorship. That’s why there are Limited Liability Companies (LLCs), Limited Liability Partnerships (LLP), etc. etc.
You may also have difficulty raising money, as banks and investors value protection against liability. For investors, a sole proprietorship is not well-structured to issue “shares” or outside ownership, this makes the process of cash for equity exchange difficult.
Additional considerations:
Here are some ancillary topics or things you may be wondering that weren’t covered in the main sections.
Should I switch from a Sole Proprietorship to an LLC or Corporation?
It may be tempting to remain a sole proprietorship for the life of your business to retain that control and simplicity–however the case can be made to eventually change the business structure to an LLC or corporation. A sole proprietorship is the perfect stepping stone to a more organized and better managed business.
The reality is, as your business grows, you are also subject to more things going wrong and at a larger magnitude. As a sole proprietorship, you have no protection against any liabilities that may occur. What if an employee gets hurt on the job? You would be personally liable for damages. This means that you may be on the hook to selling your assets to pay for any liabilities (like your house).
With an LLC or corporation that has Limited Liability, it means that you would only be liable to the extent of the company. Meaning, if the company only has $50,000 in cash and assets, that’s the extent of the liability and the company would declare bankruptcy if the liability is in excess of that amount.
I would recommend changing the business structure to an LLC if the business grows significantly and you can foresee some risks you’d rather not be held personally liable for. In most cases, it makes more sense to switch than to remain a sole proprietorship.
FAQs:
What are 3 advantages of sole proprietorship?
Simplicity: A sole proprietorship requires no additional registration, fees or paperwork to set up
Filing taxes: There’s no need to file separate taxes for the business in a sole proprietorship, you can file taxes as if you made the income entirely
Maintenance: A sole proprietorship has little to no maintenance. Unlike other business structures where you may have registration, fees, bylaws, etc.
What are the advantages and disadvantages of a sole proprietorship?
Advantages:
Simplicity: A sole proprietorship requires no additional registration, fees or paperwork to set up
Filing taxes: There’s no need to file separate taxes for the business in a sole proprietorship, you can file taxes as if you made the income entirely
Maintenance: A sole proprietorship has little to no maintenance. Unlike other business structures where you may have registration, fees, bylaws, etc.
Disadvantages:
Personal liability: a sole proprietorship does not offer any protection in the event of being held liable for damages, lost wages, medical bills, etc.
Access to capital: sole proprietorships may have difficulty raising money as banks may find it risky to lend to a business with more liability. Investors may also shy away from sole proprietorships, as they are not well structured to issue shares for outside ownership
What is better: LLC or sole proprietorship?
A sole proprietorship is a great starting point for business owners and can be ideal for simple, low-risk businesses, but it offers no protection and limited options for fundraising. An LLC can be better in many scenarios as it offers ample protection against liabilities and the ability to scale and grants access to fundraising options.
