Sole Proprietorship Pros and Cons: Is It Right for You?

ByJulija A.
February 17,2022

When starting a business, one of the first things you need to do is elect the appropriate structure. Many of the small businesses in the US are sole proprietorships as these are the simplest ventures to set up. That said, it’s important to weigh all of the sole proprietorship pros and cons before deciding whether you want to be solely responsible for both the assets and liabilities.       

What Is Sole Proprietorship?

A sole proprietorship is also known as a sole tradership or simply a proprietorship. It is an unincorporated business with a single owner who pays personal income tax on any profit that the business generates. As such, the owner is relieved of any specific business taxes or corporate tax payments, and no double taxation is possible with this model.

A sole proprietorship is one of the simplest businesses to set up because it is owned and operated by a single proprietor and the legal requirements are minimal. This is a very popular option among entrepreneurs who are looking to start a business on their own and conduct all the transactions under their own name.

Pros of Sole Proprietorship

There are several key advantages to starting a sole proprietorship, including:

  • Complete control of the business
  • The fact that this business structure is easy to establish
  • The absence of corporate business taxes
  • Very few legal and formal business requirements   

Full Control 

In a sole proprietorship, a single person has complete control over the business. As a sole proprietor, your decisions determine the trajectory of the company, and you don’t have to consider the opinions of third parties such as shareholders or legal partners. 

This is a level of freedom that isn’t afforded with other business types, such as an LLC or a C-corporation. The unprecedented level of control and the freedom to maneuver are the main reasons many young entrepreneurs choose this type of business structure. It allows the owner to experiment with different ideas and concepts before choosing the best approach. 

In other words, a sole proprietorship enables business owners to take a certain degree of risk and test out their ideas before adopting a more formal business structure. Sole proprietors also receive all the profits and are free to sell or transfer their company to another person anytime they want.  

Easy to Set Up 

Establishing a sole proprietorship is a remarkably simple process. One of the main advantages, when compared to other business structures, is that you don’t have to fill in a pile of paperwork in order to get started. Other business types require you to register with your state government before you are legally able to operate as a company. However, you don't have to register with the state when setting up a sole proprietorship, and you don’t have to worry about the considerable costs that come with starting LLCs, for example. 

The most important thing is to secure the relevant business licenses and permits. This is determined by the state, city, or county in which your business operates. A quick chat with the nearest Small Business Development Center will tell you everything you need to know. If you need any additional assistance, there are fairly affordable legal services to choose from. 

This may sound like a time-consuming affair, but it’s a faster and simpler process than setting up another type of corporation in which assets are shared.

Few Formal Business Requirements

Business structures such as S-corporations and C-corporations aren’t only costly to set up but require extensive operational processes and record keeping. The unique structure of sole proprietorships frees your business of these requirements. Essentially, you can make your own rules as long as you’re legally compliant with local regulations.

For example, a sole proprietor can skip all the meetings that are organized within LLCs to make sure all their members are on the same page and happy with the way things are running. Some companies need to have business decisions formally approved by their board of directors rather than by a single person. Such constraints don’t exist within a proprietorship. 

Businesses that have shareholders often hold votes when appointing managers and new members. This is the case with any formal action the company takes, and minutes for all of these meetings and votes need to be kept for corporations. Of course, a sole proprietor is making all the decisions for their business entity.

No Corporate Business Taxes

The federal corporate tax rate is 21% of business profits. A sole proprietor doesn’t have to make corporate tax payments and only pays a personal income tax. Any earnings from this business should be claimed as pass-through income. This means that you report the income of your business on your individual income tax returns.

C-corporations have their revenue taxed as a company but also get taxed a second time when profits get distributed to shareholders as dividends. In other words, the corporation is being subject to double taxation, something that sole proprietors don’t have to concern themselves with. 

The taxes that you should expect to pay as a sole proprietor are as follows:

  • Self-employment tax
  • Income tax
  • Sales tax

The self-employment tax is imposed on those who run their own business. This is relevant for any income from the business and ranges between 7.65% and 16.2%. As a sole proprietor, you’re required to list all profits on your personal tax return, which will be taxed at your ordinary rate.

A sales tax doesn't apply to all sole proprietors as it depends on the nature of the business. If you sell any kind of goods, you are subject to a sales tax. This also depends on the state that you are in, so be sure to familiarize yourself with local state laws before sorting out your taxes. 

Cons of Sole Proprietorship

This business structure also has its share of disadvantages. Below are the most important ones: 

  • No liability protection
  • Personally responsible for all business debts
  • Perceived lack of professionalism
  • Hard to sell 

No Liability Protection (Unlimited Liability)

Companies that are registered with the state get a certain level of liability protection due to the fact that they are legal business entities. As a sole proprietor, you are responsible for all the debts and liabilities linked to your business. Unlike the benefits enjoyed by other businesses, the government considers the sole proprietor a self-employed individual, which means that you are on your own. 

To put this into perspective, an LLC offers protections that prevent creditors from being able to seize the personal assets of the business owner if things don’t work out. It also shields the business owner from potential lawsuits related to the business. There are a few exceptions to this rule in very rare circumstances, but generally, the protection afforded to owners is extensive. 

If you are a sole proprietor, these protections do not apply to you. And if a customer is unsatisfied with the services of your company, you are the only one held liable.

Personally Responsible for All Business Debts

All of the obligations of the business fall squarely on the sole proprietor. This includes any debts for which the sole owner is held personally liable. 

Other businesses have a certain level of protection here as any financial or legal issues are that of the business itself, not the person who owns the company. Unfortunately, these protections do not extend to sole proprietorships.

Perceived Lack of Professionalism

As a sole proprietor, you will face a lot of stumbling blocks. For starters, in the business world,   sole proprietors are often perceived as people who lack professionalism as they are not registered with the state. Sole proprietors often work from home and run small businesses in order to make some extra income, rather than trying to build a large and globally recognizable company. Of course, more often than not, these perceptions are inaccurate, and there is nothing wrong with this kind of business setup. 

To avoid any misconceptions as a sole proprietor, you can obtain a “doing business as” name. Where most sole proprietors just trade through their name, a DBA can help eliminate any perceived lack of professionalism. You should also open a business bank account in this name, and all your transactions should have this name attached to them rather than your personal name.

Harder to Sell Down the Line

A sole proprietorship has its share of benefits. However, complications can arise when you’re trying to sell your business. Since the company is tied to you as an individual, it is difficult at best to sell this type of business. As such, if selling the business down the line is an important part of your plan, then this is not the best business structure for you to consider.

That said, it isn’t impossible to sell this type of company. It is simply more complicated because you need to sell your business assets rather than the company itself. While you cannot sell the company as a whole, you can still sell parts of this entity. The buyer will have to change the business name unless you have already established a separate “doing business as” name. If you have, then you simply need to give the new owner legal permission to use the name. 

What Are Your Other Options?

Sole proprietorships are far from being the only avenue worth exploring in the business world. They’re probably not a good choice for anyone who wants to develop a vast business network or needs extensive resources. If you’ve given yourself permission to think big, you might want to consider other options.

For example, if you still plan to be the only person involved, it’s possible to convert your business to a single-member limited liability company or an SMLLC. This would give you some limited liability protection and tax benefits, so your assets aren’t exposed to a certain level of risk. If you need help opening an LLC, you can hire an LLC service company to help you get started. 

Of course, LLCs have their own disadvantages, including extra costs, so make sure you have the right budget for your preferred venture.

Frequently Asked Questions
How do you start a sole proprietorship?

First, you need to make sure that this is the right type of business for you. Once you have done this, speak to your nearest Small Business Development Center to ensure that you understand the local laws and regulations for starting this type of company in your state, city, or county. If you don’t want to use your own name, you’ll have to choose a “doing business as” name and register it.

As soon as you have registered your business name, make sure you purchase a domain, register for a business license to ensure that you can operate legally, and make sure you have all the other relevant permits and licenses. 

Is sole proprietor the same as self employed?

A sole proprietor is a self-employed individual who is running his own business and does not work for anyone else. However, there is a slight difference between these two terms in that sole proprietor refers to the way that the business is structured and run, while self-employed simply refers to the fact that you do not work for anyone other than yourself.

Which is better - LLC or sole proprietorship?

This depends entirely on what you are looking for and what you are willing to compromise on when starting your business. A sole proprietorship puts all of your personal assets at risk and offers no protection but gives you complete control of the business and how it’s run. 

An LLC separates the business entity from the person so that the individual is not at risk personally if things go wrong with the business. However, there is a lot less freedom in running an LLC than there is with a sole proprietorship. As such, it comes down to what you are hoping to achieve when starting your business and whether you prefer a certain degree of protection or a great deal of freedom.

About the author

Julia A. is a writer at With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

More from blog

When running a business or reviewing our personal finances, more often than not, we find ourselves lacking funds for something. If it’s something luxurious, most of us simply won’t get it unless it’s absolutely necessary. After all, bad credit loans are something all of us try to avoid. Still, when we need something for our company to grow, we’ll try to get a loan. The more money we need, the bigger the loan’s drawbacks. So what happens if we can’t pay those loans back? Bills and debts start piling up, and you don’t know which way is up anymore. If you’ve drained every option and even bad credit loans are no longer an option, it might be time to declare bankruptcy. Is that the right choice for you, and how will you get back on your feet afterward? Well, the US government came up with a few solutions, one of them being Chapter 11. But what is Chapter 11 bankruptcy? Chapter 11 ​​Bankruptcy Explained By definition, Chapter 11 bankruptcy involves reorganizing a debtor’s assets, debts, and business affairs, which is why it’s also known as "reorganization" bankruptcy. Although it’s available to individuals and businesses alike, it’s mostly used by companies. Commonly, the debtor is allowed to keep their possessions, is viewed as a trustee, may continue to run their business, and (with court approval) borrow money again. When a reorganization plan is developed and proposed, creditors vote on it; if it passes and fulfills specific legal prerequisites, it is approved by the court. The purpose of the Chapter 11 bill was to help businesses regroup and set up a strategy for the future. This plan may contain modifying payment due dates and interests and can even remove a debt entirely. How Does Chapter 11 Work? All bankruptcy chapters, including Chapter 11, halt the collection process. Once filed, the "automatic stay" forbids most creditors from hunting you, giving you enough room to breathe and figure out your next move. This temporarily stops: Payment demands Removal or any kind of foreclosure Collections trials Till taps, property confiscation, bank levies Unlike other chapters, Chapter 11 allows the debtor to act as the trustee, meaning that they can continue everyday business functions as a "debtor in possession" while Chapter 11 restructuring takes place. However, the business can not make all decisions without court permission. Restricted decisions include sales of any assets other than inventory, creating or closing a rental agreement, taking out new loans, and controlling business operations. The court also controls payment decisions and contracts related to attorneys, vendors, and unions. Ultimately, the debtor cannot take out a loan that will begin after the bankruptcy is complete. Is Chapter 11 the Best Bankruptcy Option for You? There are nine chapters in Title 11 of the US Code, each focusing on different bankruptcy strategies. Chapters 1, 3, and 5 explain the legalities of bankruptcy for all parties involved, including the debtor, creditor, and court.  The other chapters explain who can file for bankruptcy and how to do so according to who they are or whom they represent: Chapter 12 is for family farmers or family fishers with regular income.  Chapter 15 is used in international cases. Chapter 13 is for individuals with stable income and has certain debt restrictions. Chapter 7 is the liquidation bankruptcy chapter for people who cannot create a reorganization plan and provides them with information on liquidating their remaining assets. How to File for Chapter 11 Bankruptcy Now that Chapter 11 bankruptcy has been explained, let’s go over the procedural part. It begins by filing a petition at the debtor’s residential area or incorporation location’s federal bankruptcy court. It may be a voluntary petition, filed by the debtor, or an involuntary one, filed by creditors that meet specific requirements. Then, the creditors vote if the plan within the petition is acceptable. Since the next option is usually filing for a Chapter 7 bankruptcy, meaning liquidation, creditors are typically cooperative. However, if a creditor objects to the plan, the court will get the input from creditors and other interested parties, before deciding on the best course of action. The determining factors include: Success probability Good faith The creditors’ best interest If it is fair and equitable So how long does Chapter 11 take? Well, there are technically no limitations. Some cases take only a few months, but it often takes six months to two years for a case to close.
By Nikolina Cveticanin · May 24,2022
When faced with debts that you cannot pay, it may seem like there is no way out. However, a bankruptcy discharge could release you from personal liability. Before taking any steps, it’s important to know what bankruptcy discharge means and how you can file for an order of discharge in your personal situation. Given that the average American has over $21,000 in debt from personal loans and credit cards alone, discharged bankruptcy is a relevant topic for many people across the country. Here’s all you need to know about discharged bankruptcies. The Bankruptcy Discharge Definition When it comes to the bankruptcy discharge meaning, defines it as “a court order that ends bankruptcy proceedings as old debt and hence releases the debtor from the responsibility of repaying certain types of debt.” In essence, a discharged bankruptcy will free you from any obligation to repay the debts covered by the order of discharge. This also means that creditors can no longer take action against you in relation to those debts. Those actions include debt collection, attempts at legal action, and communication with you via letters or telephone calls. A discharged bankruptcy may occur when you file a Chapter 7, 11, 12, or 13 bankruptcy. Before filing for a discharge order, though, it’s important to recognize the downsides of bankruptcy while also researching which debts can or cannot be discharged.  How Can You Get a Discharge of Bankruptcy Order? Under most circumstances, debtors are automatically given a discharge during their bankruptcy case unless creditors object. So, by informing your attorney to file for bankruptcy, an order discharging debtor liability will be included as a part of the legal proceedings.  Assuming no litigation involving objections is posted, the Federal Rules of Bankruptcy Procedure will ensure that copies of the order of discharge are provided to the debtor (you), the debtor’s attorney, the US trustee, the case trustee, the trustee’s attorney, and all creditors. The notice of bankruptcy discharge proof also informs creditors that your financial liability has been dropped and advises them not to pursue any further action. The length of time that it takes to acquire a discharged bankruptcy order depends on the bankruptcy chapter filed. Generally speaking, the timeframes are as follows: Chapter 7 (for liquidation): Courts grant discharges following the expiration of a creditor’s complaint objection period, which is usually between 60 and 90 days after your 341 meeting. This generally happens four months after you, the debtor, files a petition at the bankruptcy court. Chapter 11(for an individual chapter 11 bankruptcy): The courts grant an order of discharge once you have completed all payments under the bankruptcy agreement. Chapter 12 (for an adjustment of debts of a family farmer or fisherman): The courts will also grant the discharge after payments have been completed. Due to the nature of this bankruptcy hearing, it usually takes between three to five years to secure the discharge after the filing date. Chapter 13 (for an adjustment of debts for an individual with regular income): The order may be granted by the courts as soon as the agreed payments are finalized. Again, it often takes three to five years after the date of filing.  It should also be noted that you may be required by the Bankruptcy Code to complete an instructional financial management course. However, there are exceptions to this ruling, including a lack of adequate local educational programs or if the debtor is living with a disability. Understanding the Inclusions of Discharged Bankruptcy Orders When trying to work out how a bankruptcy discharge is relevant to your personal financial situation, you’ll naturally want to know what types of debt can be discharged. After all, bankruptcy discharge orders don’t cover everything. Section 523(a) of the Bankruptcy Code details a number of exceptions under each chapter of bankruptcy.  When filing a Chapter 7, 11, or 12, there are 19 categories of nondischargeable debts, while the list is a little smaller for Chapter 13. Below are a few examples: Certain tax claims  Child support payments  Spousal or alimony payments  Government penalties Guaranteed educational loans Cooperative housing fees While secured debts cannot be included, a valid lien or sale of the secured asset can be used to repay the debts, with the shortfall (remaining balance) subsequently being included in the order of discharge. It should also be noted that obligations affected by fraud or maliciousness won’t automatically be exempted from a discharge. It will be up to creditors to post an objection to these. If they do not, they will be included in the order discharging debtor responsibilities. Before filing for bankruptcy, it’s important to do your homework or speak to an attorney/financial advisor about the debts that can be discharged and the ones you would be liable to pay. Bankruptcy Closed vs. Discharged A bankruptcy discharge order doesn’t necessarily translate into a case closed. In a simple Chapter 7 bankruptcy without assets being lost, the closure should occur a few days after your discharge. When assets are being lost, any relevant litigation must be finalized before closure can occur. In cases where a repayment plan is needed, the closure won’t happen until after the trustee has confirmed the final report for payment distributions. Generally speaking, it is only the Chapter 7 bankruptcy cases involving difficult assets that are kept open for long periods. Although rare, it is also possible for debtors, creditors, or trustees to reopen the bankruptcy case if a debt hasn’t been listed or if false information has been provided. What Else You Need to Know About Bankruptcy Discharging Before thinking about bankruptcy, you must consider the impact it will have on your financial future. For starters, you will still be required to pay secured debts, while the impact on your credit score will last for up to eight years.  Many people who file a bankruptcy worry about what it means for their career, but the good news is that employers are prohibited from discriminatory treatment of debtors based on their bankruptcy status. This covers both public and private businesses. Furthermore, bankruptcy courts may permit those who file for bankruptcy to run businesses even before the discharge. That’s why it’s important to stay up to date on the best business banking options. A second discharge in a Chapter 7 case will be rejected if you have already received a discharge within the last eight years for a Chapter 7 or 11. This duration is reduced to six years for Chapter 12 and 13 cases. This is unless all unsecured debts from the previous discharge have been cleared. Finally, you will be advised to keep hold of your bankruptcy discharge proof letter in case creditors attempt to take action against you after the confirmation. Should this happen, you will be in a position to file a motion with the court. Should you lose your copy of the discharge order, it is possible to request another from the clerk at the bankruptcy court for a fee. Electronic documents may also be available via the clerk’s PACER system. Conclusion By now, you should have a solid understanding of the bankruptcy discharge meaning in law and how it can impact your future following any proposed bankruptcy. Under the right circumstances, it can be an attractive option that removes some of your financial burdens while also putting an end to annoying calls and debt collection actions.
By Julija A. · May 24,2022
Bonds are a good investment option for those seeking a return on their capital because they tend to offer a reliable and predictable income stream. In this article, we will explain what bonds are and how they work. We will also discuss the benefits and risks associated with bond investments and share tips on how to get started in bond investing. What Are Bonds, and How Do Bonds Work? Bonds are debt securities that are issued by governments and corporations in order to raise capital for projects, expansions, and other purposes. When you buy a bond, you are essentially lending money to the bond issuer. In exchange for your investment, the issuer agrees to make interest payments at regular intervals, as well as repay the principal amount of the loan when the bond matures. Investment bonds enable the issuer to secure cash flow at specified dates. From the investors' side, bonds are a low-risk investment with typically good interest rates. But not all bonds are created equal. Some are a better investment than others. Characteristics of a Bond Bonds come with a number of different characteristics, including the following: Face value: This refers to the amount that the bond will be worth when it matures. Maturity date: This is the date on which the bond will be repaid in full. Coupon rate: This is the annual interest rate paid on a bond. Yield: This is the return an investor will realize on a bond. On top of these basic characteristics, there are a couple of other aspects that define a bond. Some of the bonds are secured, while others are unsecured. Secured bonds typically have assets backing them that guarantee payment to bondholders if the company cannot meet its obligations. On the other hand, unsecured bonds are not backed by collateral and are a much riskier investment. Different bonds also have different tax statuses. Most are taxable investments, but there are some government-issued bonds that offer tax breaks. These are typically used as a way to encourage investments in specific projects, such as infrastructure development. Tax-exempt bonds normally have lower interest rates than equivalent taxable bonds.   Knowing the difference between taxable and tax-exempt options is a critical part of understanding bonds. An investor must calculate the tax-equivalent yield to compare the return with that of taxable instruments. Most of the tax software available online can help investors with this type of math when preparing for tax season. Callable bonds can be paid off before they mature. This commonly happens with call provisions, which allow companies to retire the instrument at any point during or after its term by prepaying them for a premium amount equal in value of interest earned on reinvested payments made over time. An Example of How Bonds Work So, how do bonds generate income for investors? Here’s an example that makes the aforementioned characteristics more tangible.  Let’s say the city of Chicago is looking to build a new community center but doesn’t have the funds for the project. So, it issues bonds to raise the cash instead of going through a crowdfunding platform or a financial institution. Each community center bond has a face value of $100. This is essentially a loan each investor lends to the city of Chicago. It promises to repay the loan in 10 years, which is the bond's maturity date. However, to be able to sell as many bonds as possible, Chicago also has to entice investors to loan them the money. This is where one of the many important bond features comes in. The coupon rate is, in essence, a yearly interest rate that Chicago will pay to its investors. For this example, let's say that each bond has a 5% coupon rate - each investor will receive $5 each year. After 10 years, when the bond is due, each investor will have yielded $150. Chicago will pay back the principal of $100 as the bond matures, which, combined with $5 of fixed income over ten years, makes quite a decent investment. Benefits of Investing in Bonds There are a number of benefits associated with bonds as an investment, including the following: Stability Bond prices are generally less volatile than stock prices, which means that they can provide stability for your portfolio. The majority of bonds are issued by governments, which are typically considered stable and less likely to default. Income Bond interest payments can provide you with a source of income. While the coupon rate is rarely as generous for the smaller investment as in our example, investing in multiple bonds with a solid coupon rate can turn into a decent annual income. Diversification Every investor knows that a diversified portfolio can make all the difference. Adding bonds to your portfolio can help to diversify your investments and reduce overall risk. Types of Bonds There are many different bonds, including government bonds, corporate bonds, agency bonds, and municipal bonds. Federal bonds are issued by the Department of the Treasury. There are three different types of bonds issued by the Treasury. Also referred to as "treasuries", these have different names based on the maturity date. Those that have a year or less to maturity are called "bills", while those with up to ten years of maturity are known as "notes". Actual "bonds" are those that have over ten years to maturity. Corporate bonds are often issued by companies that need loans much larger than angel investors, VCs, or banks are willing to provide or cannot find bank loans with favorable terms. Corporations often find it more affordable to issue bonds than to go with bank loans when the interest rates and terms are taken into consideration. Municipal bonds are issued by states and municipalities to fund different projects. Investors will often find bonds with tax-free coupon income. Agency bonds are issued by organizations affiliated with the government, such as Freddie Mac or Fannie Mae. Risks Associated With Bond Investments These investments are not without risk. The biggest risk is for the bond issuer to default on the loan, which could result in the loss of your principal investment. Additionally, bonds are vulnerable to market fluctuations, which leads to price volatility. This is partly linked to the bond’s interest rate, meaning that rising interest rates can cause the price of bonds to fall. Finally, bonds are also subject to credit risk, which is the risk that the issuer will not be able to make interest payments. All in All The most important thing to learn about bonds is the different types of bonds and the risks associated with each type. You should also know your investment goals and objectives. Bonds, as fixed-income securities, can be a good addition to an investment portfolio but aren’t the right option for everyone. Finally, it is important to remember that bonds are subject to market fluctuations, so you should never buy bonds with more money than you can afford to lose.
By Vladana Donevski · May 18,2022

Leave your comment

Your email address will not be published.

There are no comments yet