What is a Sole Proprietorship?
Everyone has a dream of working on their own, being their own boss, and forging their own professional path. Though the vast majority of jobs out there are offered by companies, there are thousands of people who work for themselves every day. In 2020-21, there were over 700,000 sole proprietorships in Australia [1].
Are you thinking of starting your own sole proprietorship? This blog will take you through everything you need to know, from the benefits and drawbacks, to how it compares with other business structures.
Sole proprietorship definition
A sole proprietorship is a type of business structure. Your chosen business structure will determine the hierarchy of your business, who is in charge of what, and how the business is defined legally.
A sole proprietorship is a business structure where the owners of the business and the business itself are legally indistinguishable. The owner of the business is entitled to all the profits generated by the business but is also liable for all the losses. This type of enterprise is usually run by one person, although the owner can often hire employees and contract work out to third parties [2].
A sole proprietorship may use a business name other than their legal name and may have to trademark their business name if it differs from their legal name. The process for trademarking your business name can vary depending on the country the business is located.
What are the benefits of being a sole proprietorship?
If you decide to set up your business as a sole proprietorship, you will have many advantages over other companies when conducting your business.
Like other business structures, a sole proprietorship business license will allow the company owner to find employees and enlist the services of independent consultants.
In many countries, a sole proprietorship is taxed at the same rate as the individual who owns it. Therefore, the business is not subject to separate taxation. It is also up to the owner of the sole proprietorship to report any and all income and self-employment contributions to their government.
Because of all this, sole proprietorships are easy to set up and cost relatively little to run license-wise. They are also not restricted by a formal business structure and are relatively keep records for.
What are the drawbacks of being a sole proprietorship?
While there are a lot of advantages to a sole proprietorship, there are a lot of drawbacks, too.
Perhaps the biggest drawback is the unavoidable fact of unlimited liability. As the owner of a sole proprietorship, you do not have the limited liability protection of an LLC or corporation and are therefore completely liable for all the company’s debts and assets. This can be particularly damaging if, for instance, a client is hurt while on your property, or is harmed by a product you make. In such scenarios, individuals and/or companies can sue you to satisfy their damages. And since your assets are tied to the company, you are personally liable for everything.
Other liabilities might include:
- Business expenses
- Business-related debts
- Product or service-related liability
- Civil damages
It is also difficult to assure business continuity. If something happens to you, like a death or injury, your business ceases to exist. The only way to maintain proper business continuity is for another individual to create another sole proprietorship and to continue the work you were doing.
It can also be difficult to access funding in a sole proprietorship. There are no shares in a business structure, and so investors are simply loaning money to the owner of the business, which gives them less control. Indeed, because the sole proprietorship isn’t a fully established company, it is very difficult to get business loans. Any lender that would loan money to a sole proprietorship must be personally guaranteed by the owner, meaning they can go after personal assets in case of a default.
Finally, and perhaps most importantly, sole proprietorships suffer from a perceived lack of professionalism. This may not be too much of a drawback if you’re planning to become a freelance copywriter or run a bakery business out of your house. However, it may become more of an issue if your business is seeking to attract major clients.
Sole proprietorships also don’t provide any kind of organizational or professional oversight of their work - they are simply a single person selling goods and services.
Sole proprietorship vs other business structures
Is creating a sole proprietorship right for you? There are other business structures that may be better suited for your and your goals.
Sole proprietorship vs partnership
In a sole proprietorship, there is only one owner. In a partnership, there are two or more. However, they are indistinguishable in many ways. Owners in a partnership are also personally liable for business debts and assets.
The main advantages and disadvantages of entering into a partnership are the same: there are more people. Because you are in a partnership, debts, and losses are spread out more evenly amongst the partners. However, each partner is also liable for the actions of the other partners at the firm. You also have to split the profits according to each partner’s stake in the business [3].
Sole proprietorship vs LLC
An LLC, or limited liability company, is a separate legal entity from the owners. The owners of an LLC can choose their management structure, processes, and which taxes they choose to pay. LLCs can also choose between paying purely income tax or corporation tax depending on its structure. You can create single or multi-member LLCs. Since the business is a separate legal entity from the owners, creditors, or someone who sues the business can’t go after the personal assets of the owners.
Sole proprietorships are more suited for new entrepreneurs since they are easy and fast to set up. However, LLCs can offer more flexibility and security for owners once the business starts to grow [4].
Sole proprietorship vs corporation
Like an LLC, a corporation is a separate legal entity from the owners and offers them legal protections from business losses and liabilities. However, corporations require a lot more work to set up and manage. Corporations also carry on if anything may happen to the owners of the company, something which isn’t available to sole proprietorships or LLCs. Corporations also have more flexibility for taxation for their employees.
Examples of sole proprietorships
There are certain types of businesses that are ideal for creating sole proprietorships. These include:
- Bookkeeper
- Home healthcare worker
- Financial planner
- Landscaping company
- Computer repair services
- Freelance writer [5]
In general, you want to create a sole proprietorship for fairly smaller ventures that you can do on your own or with the help of one or two other contractors/employees.
Invest in great technology
Sole proprietorships are created for some of our favorite businesses: independent retailers and foodservice professionals. Are you selling artisanal cupcakes on the web and at farmer’s markets? Do you have a food truck where you sell your very own churros in your village square? If you do, you’re probably a sole proprietor.
Every business like this needs a secure and efficient way of processing its payments. The best way to do this is with a state-of-the-art EPOS system.
Epos Now offers both dedicated retail and restaurant POS systems that will help you take your business to the next level.
- Onboard and train staff in minutes
- Seamlessly add eCommerce, Click & Collect or delivery
- Track margin data to identify your most profitable products
- Save hours of time with automated, real-time stock counts
- Integrate with your preferred payment partner
- Synchronize your front & back of the house to increase sales and table turnover
- Integrate with major food delivery apps to win more customers & drive revenue
- Access your data 24/7 from any device, to make smarter business decisions
- Drive repeat business and loyalty via CRM & promotions
Contact Epos Now to learn more about our systems.
