Proprietorship or sole proprietorship is a business structure that you can implement when creating a company.
It is the simplest way to start a business. Like any kind of business setup, it has advantages and disadvantages. To help you make an informed decision if proprietorship is you, we will discuss the following:
- What is a proprietorship?
- How does a proprietorship differ from other business structures?
- What are the advantages of proprietorship?
- What are the disadvantages? Should the disadvantages stop you from pursuing a proprietorship?
- Why choose proprietorship?
What is a Proprietorship?
The U.S. Small Business Administration defines sole proprietorship as a business owned and operated by one person. It is not incorporated. The law does not make any distinction between the owner and his venture.
How is proprietorship different from other types of business structures?
Aside from proprietorship, there are few other ways to form a company: Partnership, Limited Liability Company (LLC), and Corporation.
A partnership is a business owned by two or more people. The people who comprise the partnership are called partners.
The company is created when the partners formally agree to run a business together and share the profit. There are different kinds of partnerships: general partnership, limited partnership, and limited liability partnership.
A partnership is the closest in structure to proprietorship. However, while a proprietorship only has one owner, a partnership has more than one. They are both unincorporated. The owners pay for the liability incurred by the business.
Limited Liability Company
A Limited Liability Company (LLC) has aspects of both partnership and corporation. It acts like a corporation because it protects the owners from personal liability. However, it is also like a partnership because the company doesn’t pay taxes directly.
It is taxed via the income made by its members. Limited liability companies are regulated differently depending on their location.
Like in partnerships, LLC differs from proprietorship in the number of owners. Also, LLCs limit the liability of owners.
A corporation is an entity created by law that is distinct from its shareholders. It is formed to conduct business on behalf of the shareholders and shields the shareholders from personal liability. A corporation enjoys rights and responsibilities as an ordinary individual.
It is different from proprietorship in some ways. Among the differences are the number of owners, how liability is handled, and how the management of the business is done.
What are the advantages of a proprietorship?
A proprietorship has advantages that make it appealing to people who want to start a business.
Here are some of the main advantages:
1. The business is solely yours
Your name and the name of your business are the same. There are ways to changing the name of your business such as filing a name at the Trademark Office. Another way is getting a DBA (doing business as) from the county where your business is located. Even then, you are identified with it. No one can forcibly divest you of it.
2. A proprietorship is easy to set up
Unlike other business models, starting a sole proprietorship requires no formal action from the owner. It is also relatively affordable to establish it. However, depending on where the business is being established, you need to obtain the proper permits and licenses.
3. The owner has complete control of the business
The management, the hiring of employees, the sourcing of funds, what kind of product to produce, all aspects of the business are handled by the owner.
4. Tax preparation is easy
Unlike in corporations where the business pays taxes also, in a sole proprietorship the business does not pay taxes. It is the owner who pays taxes depending on the income that he got from the business.
5. A proprietorship is a great starting point
Since the business is already established in cases where a change to a corporation is wanted the transition would be less daunting. Further, any clout that the sole proprietorship has will carry over to the new corporation.
What are the Disadvantages? Should the Disadvantages Stop You from Pursuing a Proprietorship?
Like any other business structure, some disadvantages come with proprietorship.
The main disadvantage of a proprietorship is that it does not protect the owner from personal liability that can be incurred by the business. The owner and the business are treated as one entity. When the business has a debt that the assets of the business cannot cover, the owner’s persona asset can be used to pay for the debt.
Raising capital is harder. With no partners, no members, no share of stocks to sell, raising funds for the business is harder for sole proprietorships.
The downside of having complete control of a business is that all the responsibilities rest on a single person.
Why should you choose a proprietorship?
Here are some questions to ask yourself to determine if a proprietorship is for you.
- Is the business you’re setting up have a low risk of liability?
- Do you prefer having sole and complete control of the business?
- Do you want to run your business as simple as possible?
If you answered yes to the questions, then proprietorship is for you. A proprietorship is a simple first step to take in putting up a business. Later on, should you change your mind, you can consider taking on partners, incorporating, or convert to a limited liability company.
Proprietorships Simplify Business Structure
Proprietorship is a business structure that is simple to set up. It is uncomplicated and you can start right away. But you will still need a lawyer who can advise you on the various legalities. Find a lawyer or law firm that can help your businesses.