Choosing the most suitable business structure for your business is one of the most important decisions you’ll make as an entrepreneur. Irrespective of whether you’re starting a large or new small business, the entity type you select should reflect your company’s goals for you to have the best possible benefits and results. Two of the most common business structures are sole proprietorships and corporations. However, each entity type has its own advantages and drawbacks. The following guide will outline the differences and similarities between sole proprietorships and corporations and help you make an informed decision.
What is a sole proprietorship?
Sole proprietorships are unincorporated businesses having only one owner. However, if more than one owner is involved, it is automatically considered a general partnership. A sole proprietorship’s profits or income is taxed as the owner’s personal income.
They are also one of the easiest entity types to set up and maintain, making them one of the most common business structures. However, it’s not considered a separate legal entity by the IRS like other structures such as limited liability companies and corporations.
When starting a sole proprietorship, there are no forms to file or fees to pay. You only need to consider if you’re going to be using your own name as your business name. If not, you’ll need to register a DBA or “doing business as” name per your state laws and regulations.
Sole proprietorship benefits
Easy formation: One of the most obvious advantages of creating a sole proprietorship is the simple establishment of the entity. Aside from that is also quite inexpensive and less time-consuming than creating a corporation.
No restrictions on the number of employees: Sole proprietorships don’t limit the number of employees you can have, allowing you to grow and get closer to incorporating your business.
Business name protection: When running a sole proprietorship, your business’s legal name is, in fact, your name. If you’d like to change this or operate under a different name, you can register a trademark through the USPTO or file a DBA with your state or county clerk’s office.
Complete control: As a sole proprietor or owner of your business, you have complete control of the day-to-day operations, decision-making process, etc.
Sole proprietorship drawbacks
Unlimited legal liability: Since there’s no separation between the sole proprietor and the business, the sole proprietor is liable for all debts and obligations, malpractice claims, lawsuits, etc., brought against the business.
Skills and experience: It can be quite challenging for sole proprietors to manage all aspects of the business alone. A sole proprietor must have the necessary skills and experience to make sound decisions that ultimately cause the business to succeed or fail.
Backup and succession: If the owner does not want to run the business, it ends. Additionally, since sole proprietorships do not have separate legal identities, the business cannot pass any tangible assets from one owner to another.
Limited access to credit: Other types of business structures like corporations, limited liability companies, and partnerships have more history and income when applying for credit than sole proprietorships, so it becomes increasingly challenging for sole proprietors to secure financing as they are seen as individuals and not businesses.