The 411 on Sole Proprietorships

Posted by Ben Jones on May 23, 2007

I have been avoiding this series of posts since I started this blog because I didn’t think that they would be much fun to write. However, I feel the time has now come to start to discuss business models. Therefore, I will devote my next few posts to discussing Sole Proprietorships, Partnerships, DBA’s, LLC’s, Corporations, and S-Corporations. These will each be individual posts and should shed some light onto which model would work best for you.

The first business model that I will cover is called a Sole Proprietorship. Sole Proprietorships are the most common form of business. The two main reasons for this are because they are the easiest to start and they require the least amount of start-up money. Sole Proprietorships are simply businesses that are owned and operated by one person. So anybody who decides to offer services in exchange for money, and are not incorporated, are sole proprietors.

Con’s of Sole Proprietorships

In a sole proprietorship all responsibility and liability fall back on the owner.This is one of the major drawbacks of this business. It forces you, the owner, to take responsibility for any losses incurred by your business. I advise you to give a lot of consideration to that one fact. Especially considering the high failure rate for new businesses. To take this a step further, your business taxes and personal taxes are not separate. You will be taxed, at the personal rate, for money made from your business.

As a general rule, tax laws are very lenient on businesses. However, you get none of this benefit as a sole proprietor. You are actually being penalized because it is like having more personal income to owe taxes on. This is why I encourage people to incorporate. Every method of incorporation offers more benefit than a sole proprietorship. Most wealthy people incorporate non-operational companies just so that they can reap some of the tax benefits that come with owning a business. So why would anyone who owns a fully functional business not take advantage of this?

In addition to that, sole proprietorships do not provide any name recognition or protection. In most states, a sole proprietor cannot legally conduct business in any name other than their own. The minimum that is required for businesses in most states is a DBA. DBA stands for “Doing Business As” and does not provide any tax benefit. It just lets your governing state know that you are the tax payer for the business operating under that name. (I will post more details about DBA’s later this week)

You have probably noticed that I haven’t given many pro’s of starting a sole proprietorship. That is because I do not endorse this method of business. I do think that it is O.K. to start a business as a sole proprietorship if you do not have the funds to incorporate. But I suggest that you incorporate your business as soon as possible. Most incorporation fees are no more than a couple hundred bucks but it is more than worth it. Especially if you intend to make a lot of money. Nonetheless, there are a few advantages of this model so I will close this post by listing the Pro’s & Con’s.

Advantages

Minimal Business Knowledge Required
Personal Tax Advantages
No sharing of Profits
Low Start-Up Cost
You are Sole Decision Maker

Disadvantages

Unlimited Liability
If you are not working, you are not being paid
Difficulty in Raising Capital
No Name protection
Minimal Chance of Tax Benefit