What Are the Main Advantages of a Sole Proprietorship?

What Are the Main Advantages of a Sole Proprietorship?

by Edward A. Haman, Esq., October 2017

Although there may be good reasons to use another form of business organization, there are also advantages to “going it alone" with a sole proprietorship. Mainly for the purpose of protecting personal assets from business obligations or potential lawsuits, many experts advise the formation of an LLC or a corporation.

However, for various reasons, many business owners opt to run their business as a sole proprietorship. Sole proprietorship advantages include:

  • Having control of your business
  • A simplified and less expensive business organization
  • Privacy
  • Minimal reporting requirements
  • Simplified tax reporting

Each of these sole proprietorship benefits will be discussed below.

You Are in Control

Since you are the only owner of a sole proprietorship, you are in complete control of your business. All of the decisions are yours to make. You do not need to seek the approval or consent of any partners, members, officers, directors, or shareholders, as you would need to do if you had a partnership, LLC, or corporation.

One question to ask yourself is: Do I want to be the sole decision-maker, or would I be more comfortable having one or more co-owners to help with the decision-making?

Simplified and Less Costly Organization

There are no forms to complete, and no government fees to pay, to form a business as a sole proprietorship. Forming a general partnership typically doesn't require any government forms, but it is advisable to have a formal partnership agreement in order to outline the rights and duties of the partners, and to resolve any disputes that may arise. Other forms of business organization may require filing some federal and state government forms, and paying significant fees.

For example, in certain situations, a limited partnership may come under the authority of securities laws and their disclosure requirements. An LLC or corporation will require formation documents to be filed with the appropriate state agency, and the payment of filing fees.

If you decide to operate your sole proprietorship under a business name that is separate from your name (typically called an assumed name, a fictitious name, or a doing business as [d/b/a] name), there usually will be a fairly simple state government form and a small fee to pay.

Privacy

Since a sole proprietorship does not file any formation documents or annual reports with the federal or state governments, your business operations are not subject to public disclosure like an LLC or corporation.

Minimal-to-No Reporting Requirements

A sole proprietorship does not need to file an annual report with the state or federal governments. In most cases, partnerships do not need to file an annual report; however, LLCs and corporations will be required by law to conduct certain meetings of members or shareholders, and file certain reports with the state government.

Simplified Tax Reporting

The sole proprietorship tax advantages are simplified reporting requirements and not having to pay separate taxes for the business.

A sole proprietorship does not need to file any special tax forms with the state or federal government. Generally, the only tax form a sole proprietor will file with the IRS is a Schedule C (Profit or Loss from a Business) as part of their annual Form 1040.

With a partnership, business profits and losses must be divided among the partners, and reported to the IRS. All partners must report their share of the partnership profit or loss on their tax returns. With a small LLC or a corporation, you can make an election to have the profits taxed as if it were a sole proprietorship or partnership. If this election is not made, the LLC or corporation itself may need to file tax returns (and pay a separate taxes), with the shareholders also paying taxes on their share of the profits.

Conclusion

Organizing your business as a sole proprietorship has several advantages. However, this decision should take into consideration all of your circumstances, including whether you will need others to invest in your business, your personal asset protection needs, and your tax situation.