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What is a sole proprietorship?

October 10, 2014

Because a sole proprietorship is the simplest form of business an entrepreneur can start, it is also the most prevalent small business type.

A sole proprietorship is a business run by a single owner. Because there are no other people involved in running your business, you are entitled to all of the profits gained, as well as responsible for all debts incurred by your business. Many sole proprietorships can even be run out of owners’ own homes, whether they manage their home design services from their bedrooms, or perform bookkeeping services for clients from their basements.

But before jumping ship to start your own sole proprietorship, you should look at all of the potential benefits and hardships that come with starting your own business. Here are some things to think about before becoming a sole proprietor.

    • Ease of startup.
      Because sole proprietors run their businesses on their own, there is no formal action necessary to begin working. After obtaining the proper licenses and permits, as well as registering your business name if applicable, you can get started quickly and easily.
    • The owner and business as one entity.
      Owners and their businesses are directly tied up in terms of their assets and liabilities. Owners can mix their funds between their business and their personal savings, and they are not taxed separately for their business. However, business owners are also liable if their businesses lose money, and sole proprietors can be forced to pay any outstanding business debts from their own pockets. Sole proprietors need to learn how to manage these pressures in order to overcome business stresses. One way to minimize these pressures is to make sure your small business is insured against any potential damages or unforeseen hardships. Taking out liability insurance may protect your small business from claims of negligence, while commercial property insurance could protect you from damages to your furniture and equipment.
    • Total control over business direction. Without having to consult with business partners, business decisions become much more fluid. Business owners can make decisions and changes to their businesses instantly, exercising complete control over their business directions. This makes it much simpler to evolve a business from one stage to the next. However, without a business partner to sound off to, sole proprietors run the risk of making risky decisions without fully evaluating all of the potential downfalls.
    • Lack of outside funding.
      It can be hard for a  privately held company to raise the necessary capital for everyday business expenses. Without the ability to sell stock in the business, investors are unlikely to give your small business a second glance. Banks are also equally hesitant to lend to businesses they deem risky, due to the lack of repayment security in case of business failure. However, whatever profits the business ends up gaining go directly into the owner’s pocket, because there aren’t any business partners with whom to split the earnings.

Evaluating all sides of your situation before jumping into a sole proprietorship is necessary to ensure that you’re ready to take on this business decision.

Tell us! Are you thinking of starting, or have you started a sole proprietorship? What are some of the challenges you have faced as a business owner and how did you overcome them?