The Benefits and Drawbacks of Being a Sole Proprietorship

Sole proprietorship. It’s the easiest, most common form of small business ownership in the nation. According to a 2017 report from the SBA’s Office of Advocacy, there are nearly 30 million small businesses in the U.S. Nearly 23 million of those are sole proprietorships.

There are lot benefits to being a sole proprietorship, but as your business grows, there are some good reasons to consider restructuring your business as an LLC (limited liability company) or by incorporating.

Why An LLC?

Liability

Under a sole proprietorship, there’s no delineation between you and your business. You are, for all intents and purposes, the same entity. This puts you and your personal assets at increased risk should your business not be able to pay its debts or be sued by someone. Under an LLC or by incorporating, your business becomes a separate legal entity all its own, which means your personal assets are protected should your business run into financial or legal troubles.

Capital

As a business grows, it often needs capital. Because of the legal protections and more formal structure, many lending institutions require you to set up an LLC or corporation before considering whether or not to offer you financing.

Contracting

If part of your growth strategy involves getting contracts with larger businesses, you may find that many of them have stipulations on required legal structures. You may have to be an LLC or corporation just to bid on a contract.

Taxes

As a sole proprietor, you have to report all your business income on your personal tax returns. Among other drawbacks, that means that all of your profits are subject to self-employment taxes. When you’re a small sole proprietor and not making much profit, it may not be as much of an issue. But as your business grows, the ease of reporting business income on your personal returns may not be worth it. Consult a CPA or tax advisor for guidance on the business structure best suited to your business.

Perception 

There’s nothing wrong with running a “Mom and Pop Sole Prop” (though only “mom” or “pop” can actually be the sole proprietor). As I mentioned earlier, it’s by far the most common form of business ownership. But when it comes to taking your business to the next level you have to consider the perception (right or wrong) that an LLC or corporation is taken more seriously and seen as more reliable, responsible and with a larger potential for success by its customers, clients and vendors than a sole proprietorship is.

The Next Level of Business

For additional advice on taking your sole proprietorship to the next level, the SBA has several resource partners who can help. Visit SCORE, the America’s SBDC Iowa or the Iowa Women’s Business Center at the Iowa Center for Economic Success for more information.

The Small Business Success Summit is the premier annual business conference for startups and small businesses. For more information, click here.

Learn about other “How to Start a Business” resources in The Partnership’s Small Business Resources Hub or sign up for the Small Business Resources newsletter and stay connected for information about upcoming events, other resources and the latest announcements in the small business community in Greater Des Moines (DSM).