A sole proprietorship is usually the type of business entity that new business owners form. This is because it is very easy to start with a sole proprietorship. However, it is important to first learn more about how they all work so you make more informed decisions when you are registering your business. Today we will talk about the pros and cons of a sole proprietorship and the importance of choosing the right business structure if you apply for a sole proprietorship funding to fund your business.
What is a Sole Proprietorship?
A sole proprietorship is a business that has no separate existence from its sole owner. The business and the person are on in the same. For example, a sole proprietor is someone who starts a home-based business selling products online. The process is simple, the person simply registers a DBA name for the business in their state and begin operating. When the business owner files their personal tax return, they report their business income and profit or loss.
Pros of a Sole Proprietorship
The biggest advantage of a sole proprietorship business is the fact that it is easy to set up. As soon as you register your business you can start to operate immediately. There is not much wait time or paperwork when registering a proprietorship business. It is also inexpensive to set up (depending on the stage your business is at).
Cons of a Sole Proprietorship
The biggest disadvantage of a sole proprietor business is that you are personally liable for any business debts that your company incurs. For example, if you purchase supplies for your business and do not pay the supplier, your personal credit will be negatively affected. Even though the supplies are for your business, you and the business are one, so you are liable for the debt incurred. You can put your personal assets at risk if the supplier sues you for the money and you do not have it. Your personal assets can be seized for business debts you fail to pay as a sole proprietorship.
Sole Proprietorship Funding
If you want to get finding through a bank, lender, or investor, you should consider registering for a limited liability company (LLC) or a corporation instead of a sole proprietorship. If you have a limited liability company or corporation, you are going to look like a more legitimate business. For example, someone who has a home-based business will be okay as a sole proprietorship but for a high-tech company it does not make much sense. It all depends on the type of business that is being built, the business industry, and the goals of the business owner.
The Bottom Line
The bottom line is that a limited liability and a corporation provide greater protection for the owner than a sole proprietorship. Under an LLC or a corporation, the business owner is not personally liable for the business debts incurred. It is recommended that business owners who need capital register with an LLC or corporation to protect themselves from being liable for the business debts. When you are starting out your business, your chances of failing are high. By forming an LLC or corporation instead of a sole proprietorship you are going to protect yourself.