Small Business Sole Proprietorship

Most small businesses start out, and continue, as a business owned and run entirely by a single person. As such, the most suitable business structure for a small business, at least in the initial phase, is a sole proprietorship, which is a business without a corporation or limited liability status, where the proprietor is legally and fully responsible for all aspects of the small business. This includes all work related to part-time and secondary income sources, consultancies and contractors. Let’s take a quick look at the advantages and disadvantages of a sole proprietorship.

Advantages:-

• Low start-up costs and filing requirements: Unlike incorporating a business, a sole proprietorship is easy, in expensive and quick to get going. No minimum capital requirements or articles of incorporation, no need to appoint additional managers or hold annual meetings.
• Simple tax filing: One individual income tax return (IRS Form 1040) which includes all your transactions, expenses, earnings, profits and losses, both personal and for the business, with a single self-employed tax being applicable.
• Financial record handling: The flow of money, whether personal or for the business, is not differentiated, thus freeing you of the necessity of maintaining separate records for the business, such as payrolls or payment of business expenses. Please note that it is advisable to maintain a separate bank account for business income and expenses, in order to take benefit of tax credits available exclusively for business expenses.

Disadvantages:-

• The risky part of doing business under a sole proprietorship is your exposure to liability. An incorporated company is protected by limited liability, where the personal assets of the owners are safe from being taken away in lieu of business debt or damage claims. This safety is not available for sole proprietorships.
• The lack of mandatory requirements for maintaining financial records for the business often leads to a lack of awareness of the actual state of the business, with the owner having no idea of the actual and net earning and profits, not to mention expenses. Thus, it is very difficult to gauge the performance of the business as a separate entity, and make needed adjustments to expenditure levels and business models.
• Since a sole proprietorship is essentially a one man show, the continued growth of the business becomes a bit difficult as the business becomes bigger, since the owner is unable to spend time on each aspect of the business. Thus, if the owner is focused on providing service to existing customers or manufacturing products, the procurement, marketing and financial aspects of the business tend to suffer.
• Raising new capital for business expansion becomes more difficult, since there are no clear cut financial records stating the profit of the business. Thus, all loans, or investments, are actually based on the personal financial history of the owner, rather than the profitability and potential of the business.

In summary, while a sole proprietorship provides a quick and easy way to start doing business, future prospects for growth and stability are hampered by the above listed disadvantages. At some point of time, a small business owner will find it necessary to change over to a corporation, in order to ensure continued survival and growth of the business.