Make sure your small business is able to keep running should you or an employee get injured or sick.
As a current or prospective business owner, you want to make sure that your business structure positions you to succeed. To that end, many entrepreneurs start their business journey with a sole proprietorship. Later, it often shifts into a partnership, corporation, or whatever best suits the specific business.
Thus, as you think about how to start up your first business, you should consider whether being a sole proprietor is right for you. Or, if you already have a business, is it worth remaining a sole proprietorship? This guide will walk you through various sole proprietorship pros and cons to help you decide.
Sole proprietorship benefits
Sometimes, when we’re left to our own devices, we can think and work unencumbered by others’ needs and expectations. Some of the biggest benefits of a sole proprietorship for a small business owner has to do with the independence it affords:
Low barrier to entry – A sole proprietorship is relatively easy and cheap to set up. In fact, even if you don’t register your business as any kind of formal structure, the IRS will default to treating it as a sole proprietorship. The only real costs and requirements, beyond basic business expenses, are:
- Fees for any required licensure, certificates, or registration in your state
- Premiums for any required insurance in your state
Unified finances – Since your business and personal finances are one and the same, they (or it) can be easier to manage. There’s no need to keep multiple separate accounts, and the taxes you file are simpler and lower-rate, being personal rather than corporate.
Total control – Finally, your business is totally yours. All profits belong to you, you set all the rules, you have as much flexibility as you need or want, and the customer is only right if you say so!
In addition to all these positives, there are of course some down-sides in the form of complexities and risks you face. Let’s take a look.
Sole proprietorship drawbacks
Total control – The flip-side of having total control over your business is that everything is your own responsibility. You must take care of every issue that arises, regardless of who seems to be at fault. All mistakes are your own.
Liability, unlimited – With great power comes great liability. Your finances being tied to your business’s means that you’re personally liable for business costs and debts, such as those from lawsuits. In practice, that means: Your business could cost you your personal savings. Your personal assets, like your car and home, are also at risk.
Barriers to exit – And, while a sole proprietorship is easy to set up, it’s difficult to sell off should the need arise. That’s because it’s hard to distinguish it from your personal assets and, therefore, hard to accurately value it.
All in all, these risks may not tip you over into reconsidering. But luckily, if you are, there are some other options.
Other options to consider
If you’re not already locked in to a sole proprietorship business, there are alternative business structures to consider that can offer you many of the same advantages without the disadvantages. Of course, every structure will have a new set of potential disadvantages but many of them have liability protection built right in for the business owner.
For instance, you might consider a:
General partnership – Very similar to a sole proprietorship, just with more than one person—and more structure. If you have one or more potential business partners in mind, registering as a limited or limited liability partnership enables you to separate your business and personal assets.
Limited Liability Company (LLC) – Similar to a sole proprietorship and general partnership, an LLC offers you much of the same flexibility to run your business on your own, but it also separates your business from your personal assets so that you won’t be personally liable for business debts.
Corporation – The farthest thing from a sole proprietorship, a corporation offers you the most possible security in exchange for the highest costs and least flexibility. A corporation is a completely separate legal entity from your person, and it can live on with or without you.
As you continue thinking about the shape your business will take, it’s important to keep your options open and consider all possibilities.
What you need to get your business off the ground
Whether you do decide to stick with your sole proprietorship or opt for an alternative business structure, you’re going to need to get some basic necessities set up to ensure your business is positioned to grow.
Namely, you’ll need to secure:
- All registration and licensure you need to practice business in your state
- A strong web presence to network and conduct business online
- Insurance coverage to protect your business from risks
For that last point, we can help.
Here at Thimble, we simplify business insurance. Whether you’re new to the sole proprietorship structure or a seasoned CEO, we believe you deserve insurance that’s easy and fast to sign up for, affordable, and tailored to your specific needs.
That’s why we’ve revolutionized the market with coverage that works when you do.
To meet the flexible needs of your business, you can buy a plan by the hour, day, or month. And getting a quote and policy is instant. After answering a few questions, reviewing your quote, and purchasing, you can get coverage in less than 60 seconds.
- Third-party bodily and personal injury
- Third-party property damage
- Professional negligence
- Medical and legal fees
Sole proprietorship: Is it right for you?
Or, the flexibility of a sole proprietorship might be exactly what you’re looking for! In any case, the fact that you’re trying to identify the best business structure shows that you have great foresight. Just remember to cover all your bases, invest in safeguards, and plan for taxes. This way, your company will be able to grow and sustain healthily.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.