Business owner behind the counter at a sandwich bar

Sole proprietor pros and cons

In the U.S. there are many sole proprietors so let’s have a look at the benefits as well as what the limitations are. Hopefully this will allow you to make a more informed decision about the type of business structure you wish to choose

Pro's of being a sole proprietor

  1. You are the boss. You make all the decisions and don’t have to worry about input from any other parties.
  2. You keep all the profits.
  3. Start-up costs are low. To start a small business, I would recommend looking into what type of business licenses you need and what sort of insurance (if any) you are required to have to be able to perform that role. For example, in the state of Tennessee, if renovators use unlicensed contractors they get hit with a penalty at the end of the year.
  4. Establishing and operating a business is simple. With the above-mentioned licenses and a little bit of research, you can start.
  5. It is easy to change your legal structure if the business takes off.
  6. It is easy to close the business down if things don’t go as planned.
  7. It is easy to use the qualified business income deduction Section 199A. Section 199A allows sole proprietors or pass-through entities to set up pension plans to reduce their income. This can then make them eligible for a 20% tax deduction. This deduction could amount to savings of over $100,000 in taxes.
Smiling bearded man wearing gloves, owner of a small woodwork business, standing in his workshop

Cons of being a Sole Proprietor

  1. You have unlimited liability for debts as there is legally no difference between the business assets and your personal assets. For example, if a customer slips and falls on a job site injuring himself, the customer could sue the business. If the business does not have enough money to pay the judgment, the court can order the owner to sell personal assets like houses or cars to settle the suit. This risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  2. The capacity to raise capital is limited, especially at the start of a business.
  3. Retaining high caliber employees can be difficult.
  4. It is hard to get away from your business, take holidays, or go overseas to spend your business money.
  5. You are taxed as a single person. While a sole proprietor isn’t necessarily double taxed, they do end up getting taxed both for the business income and self-employment taxes. This would mean that a sole proprietor would have to pay 15.3% in self-employment taxes which consists of 12.4% for Social Security and 2.9% for Medicare.
Small business owners couple

Sole proprietor pros and cons overview

  1. You have unlimited liability for debts as there is legally no difference between the business assets and your personal assets. For example, if a customer slips and falls on a job site injuring himself, the customer could sue the business. If the business does not have enough money to pay the judgment, the court can order the owner to sell personal assets like houses or cars to settle the suit. This risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  2. The capacity to raise capital is limited, especially at the start of a business.
  3. Retaining high caliber employees can be difficult.
  4. It is hard to get away from your business, take holidays, or go overseas to spend your business money.
  5. You are taxed as a single person. While a sole proprietor isn’t necessarily double taxed, they do end up getting taxed both for the business income and self-employment taxes. This would mean that a sole proprietor would have to pay 15.3% in self-employment taxes which consists of 12.4% for Social Security and 2.9% for Medicare.

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