Sole Proprietorships: Is the Ease Worth It?

Let’s say that you are thinking of starting a small business. But you aren’t really considering a major business, with employees or even a physical office. This is more of a “side hustle,” perhaps with the hopes of it one day blossoming into more.

This is often the situation that leads business owners to form sole proprietorships.

What is a Sole Proprietorship?

A sole proprietorship is nothing more than you starting a business, without actually filing any corporate paperwork with the state. It’s just you, “doing your thing,” and making money doing it. In most sole proprietorships, the owner is the business—think of freelance writers, photographers, DJs or handymen.

What are the Benefits?

One big benefit to starting your business as a sole proprietorship, is that all you have to do is start doing business. It is easy and cheap to start, with no state regulations or requirements, nor any legal requirement to have any formal corporate documentation.

Another benefit—as the word “sole” implies—is that the business is only you. That means there is no need to deal with shareholders, partners, managers, or anybody else. You have the freedom and autonomy to run your own ship, and do what you want.

No board of directors will ever remove you, no shareholders will ever sue you, and you don’t need anybody’s permission to do anything.

Lastly, because the business is just you, the taxes are easier. There are no corporate taxes, or separate tax entities. It’s just you, and all corporate profits or losses run through you.

The Downside

But there are drawbacks as well.

One major drawback is funding; banks and lenders often will not lend to sole proprietorships, and even private investors are often very wary of giving money to a sole proprietor.

Another major drawback is that because there is no separate legal entity, your personal assets are at risk; if the business gets sued, or in financial trouble, creditors or judgment holders can and will come after your personal assets. You have no corporate veil to hide behind.

In fact, the opposite is true also; your personal creditors could collect on your business’ assets, like its machinery, its tools or its bank accounts. The business doesn’t own that property: you do.

Another often overlooked disadvantage is that your business dies when you do; there is no separate legal entity that you can leave to your family or kids, or to anybody else. The legacy you build in the business, will be gone once you are gone.

And while your taxes are easier because there is no separate legal entity, you do not get as many tax breaks as a separate entity, like an LLC or a corporation would have. This can lead to you paying more taxes in the end.

What’s the best way to start your new business? Let us help. Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today to help you draft business contracts.

Sources:

dos.fl.gov/sunbiz/start-business/corporate-structure/#:~:text=A%20sole%20proprietorship%20is%20the,the%20business%20and%20the%20owner

chamberofcommerce.org/sole-proprietorship/florida