What Are Four Advantages and Disadvantages to a Sole Proprietorship?

Sole Proprietorship

Choosing a business entity type is an issue which challenges many California startup business owners. Sole proprietorships, limited liability companies, and corporations all have different legal advantages and disadvantages. The experienced business law attorneys at Startup Company Counsel can help you determine which entity type is right for you and your business.

Let’s take a closer look at sole proprietorships to identify situations in which this entity type is appropriate:

Advantages to a Sole Proprietorship

  • The formalities and documentation for establishing a sole proprietorship are less onerous than those required of other business entities. This, in turn, makes it less expensive to start a sole proprietorship than starting other types of businesses.
  • Sole proprietorships are not subject to payroll tax, unemployment deductions, and other similar taxes. Instead, the owner pays tax on the company’s income as part of his or her personal income tax returns.
  • The sole proprietor retains complete control of the business. He or she may transfer assets of the business, or sell it altogether, at any time.
  • The sole proprietor is entitled to all profits from the business. There are no shareholders or partners who can claim a right to dividends.

Disadvantages to a Sole Proprietorship

  • Because the sole proprietor retains complete control of the business, it can be difficult to find investors. Any potential investor must be willing to hold a financial stake in the sole proprietorship without any means of protecting his or her investment, as well as his or her personal assets.
  • The business owner is personally liable for all debts incurred by the business. This also extends to liability incurred by any employees of the business.
  • Many sole proprietors find it difficult to achieve a balance between their personal and professional lives. When there is no one else responsible for the business, it can be difficult for an owner to take a simple vacation, or even time off for emergencies. The stress of sole responsibility is also a burden that is not suited to all business owners.
  • Certain tax deductions are not available to sole proprietors, such as health insurance. A sole proprietorship is also subject to inheritance taxes upon the owner’s death (because it is property which becomes part of the owner’s estate).

Reliable Legal Advice to Start Your Business Profitably

Let the experienced attorneys at Startup Company Counsel help you build a successful business from the ground up. Schedule a consultation today by calling (408) 441-7555, emailing admin@startupcompanycounsel.com, or submitting a request through our online contact form.

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