Advantages and disadvantages of sole proprietorship

When you are deciding what kind of business to open, it's important to have the most appropriate format for practical, legal and tax purposes. Is a sole proprietorship right for you? Let's find out.

A sole proprietorship is the simplest kind of independent business, as it doesn't need to be registered as a legal entity. You can only choose this option if you're a single owner, though, whether or not you employ or contract other people during the course of your work.

A sole proprietorship is often the ideal choice for a professional in private practice, a guest house owner, or the owner of a small craft business, for example. For many, the advantages outweigh the disadvantages, as long as the business is carefully managed.

Advantages of a sole proprietorship

  • It's a simple format to set up and manage, as it doesn't have to be legally registered
  • It's suitable for a single owner, whether or not he or she employs or contracts other people
  • You can start trading under your own name or a trading name immediately
  • You do not have to separate your own finances of those of the business (since you are the business), and you are taxed according to personal income tax rates
  • Your only legal and financial obligations are those you have towards yourself

Disadvantages of a sole proprietorship

As with all coins, there are always two sides. In terms of a sole proprietorship:

  • There's no distinction between the business's assets and the owner's assets
  • You are also responsible to pay any debts and liabilities incurred by the business

It may seem that this business format is the easiest and quickest, but it's not necessarily appropriate for you. Going this route when you should be registered as some other legal entity (because of a high turnover, for example) could end up costing you money and red tape along the line. 

Do enough research and speak to a legal/tax professional in this area to structure your personal and business assets in such a way that you will have some protection should your venture fail.

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