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Advantages & Disadvantages of Sole Proprietorships | Everything You Need To Know

What is a Sole proprietorship?

More than 95 percent of all businesses in this country (USA) are classified as proprietorships. This is the purest form of legal structure, generally requiring only a local business license to operate. The owner, usuallý serves as manager.

The primary advantages of this Sole Proprietorship are:


Easy to form. Establishing a sole proprietorship is inexpensive and straightforward, requiring little or no government approval. Check with the local court clerk to determine if there are any licensing requirements.

The owner keeps all of the profit. The owner is entitled to all profits & benefits generated by the business.
Freedom from government regulation. Most government agencies direct their regulatory efforts toward large corporate entities, although the government paperwork requirement for small businesses has increased somewhat over the last decade. Whatever the case, small firms are expected to comply with all local, state, and federal regulations, even though governmental policing is held to a minimum.

Low taxes. The owner of a sole proprietorship is taxed as an individual, at a rate usually more economical than the corporate tax.

Complete control. The owner makes all the decisions and determines the management policy quick decision-making capability. One person can make faster decisions than many individuals.
Little working capital needed. In many cases, a sole proprietorship can be operated with limited capital requirements.

Easy to terminate. A sole proprietorship can quickly and easily cease operations without red tape.

Disadvantages of the sole proprietorship form of legal organization are as follows:


Lack of continuity. If the owner becomes ill and dies, the business may terminate.

Unlimited liability. The owner is legally responsible for all debts of the business without question. If the business fails and debts are outstanding, creditors may sue the owner to satisfy their claims. The owner’s assets could be at risk. Certain types of loss (physical, personal injury, theft) can be prevented by maintaining adequate insurance programs.

Capital starvation. Sole proprietorships have difficulty raising money because of the limited funding alternatives available to this legal form.

Owner spread too thin. The owner has to wear many hats, performing a number of diverse business functions (marketing, purchasing, and bookkeeping).

Lack of expertise. Generally, a proprietorship is a one-person show, with limited experience in many facets of business operations.

Difficult to transfer ownership. Selling all or part of a sole proprietorship can be equated to the difficulty involved with the transaction of real estate. In many cases, real estate is required.

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