6 Sole Proprietorship Advantages and Disadvantages in 2023
Starting a new business is an exciting journey! If you’re just getting started, you may have questions about sole proprietorships and how they work. As a business owner, it can be challenging to find the necessary information. However, don’t worry – we’re here to guide you through the process and provide the essential details you need to know about sole proprietorships.
What is a sole proprietorship?
If you’re looking for a straightforward business structure, a sole proprietorship might be the right choice for you. It involves one individual owning an unincorporated business, where the owner takes on all the responsibilities, both profits, and debts. This sets it apart from corporations, where multiple owners and shareholders share the responsibilities and profits.
What are the responsibilities of the owner of a sole proprietorship?
Are you curious about what a sole proprietorship means? As per the Canadian government’s website, a sole proprietorship involves an individual taking on full responsibility for decision-making, profit retention, and loss claims.
Additionally, it’s worth noting that there is no separate legal status for the business, and the owner assumes all the risks associated with the business, including personal property and assets. In short, as a sole proprietor, you have complete control over decision-making, hence the name ‘sole’ proprietorship.
Advantages of a sole proprietorship
1. Affordable and simple
Are you considering registering as a sole proprietor and wondering about the benefits? The advantages of a sole proprietorship include simplicity and affordability, especially when registering with Ownr. However, before you decide to register as a sole proprietor, there are a few crucial factors you need to consider.
2. You have freedom and flexibility
Are you interested in the freedom and flexibility of owning and operating a business as a sole proprietor? Compared to registering as a corporation, the process of registering as a sole proprietorship is quicker, more cost-effective, and easier to manage. As a sole proprietor, you’re not bound by complex regulations that can be burdensome for small business owners with limited resources. This allows you to have more control over decision-making and business operations, making it an attractive option for entrepreneurs who value independence.
3. Less paperwork
As a business owner, the last thing you want is additional paperwork, which is why some people opt to register their business as a sole proprietorship instead of incorporating it. When you incorporate a business, you’re required to file yearly documentation, which can be a burden for some.
Registering as a sole proprietorship comes with the added benefit of reduced overhead costs, as you won’t require a bookkeeper to navigate the complexities of securities laws and incorporation. By minimizing paperwork, you can dedicate more time to developing your unique business strategy, reducing the risk of potential setbacks in the future.
4. Simpler income tax
As a sole proprietor, you’ll find that taxes (commonly referred to as self-employment taxes) are considerably more manageable than other business structures. Small businesses that register as sole proprietorships benefit from various tax deductions, which can significantly reduce their tax burden.
For example, if you use your home as a business base, you can write off a portion of your housing costs, such as utilities and internet expenses. This can result in lower personal taxes and, in some cases, even a tax refund when you file your tax return. Corporations don’t enjoy this advantage, making sole proprietorship an attractive option for small business owners.
5. Say hello to lower business fees
One of the most significant advantages of registering as a sole proprietorship is the considerably lower fees when compared to incorporating a business. Unlike corporations, a sole proprietorship does not have a separate legal identity, and in some instances, registration isn’t required. However, if you operate your business under a name other than your legal name, you’ll need to register it. Many sole proprietors choose to register their business name, regardless of their regional requirements, to present a more professional image.
6. Straightforward banking
Dealing with complicated banking can be a significant hassle for business owners. However, one of the notable advantages of a sole proprietorship is banking simplicity. While it’s possible to use your checking account for your business needs, it can become a nightmare during tax time when you need to separate expenses. For this reason, it’s advisable to open a separate business bank account, which can be done quickly, inexpensively, and even online.
7. Simplified ownership
A sole proprietorship is the simplest form of business structure, where a single owner makes all decisions, takes on all responsibilities, and has complete control over all aspects of the business. This structure is ideal for many small business owners as there is no risk of discord between owners of corporations or partnerships. As a sole proprietor, you have complete control over your business and aren’t at risk of losing control.
Disadvantages of a sole proprietorship
1. No liability protection
A sole proprietorship may seem like a simple and attractive business structure, but it comes with personal liability. As the sole owner, you are responsible for all financial aspects, including debts and legal issues. This puts your assets at risk, and having separate business insurance can be a smart move to mitigate this risk.
Compared to incorporation, sole proprietorship lacks limited liability protection, which can be a major concern. With incorporation, the liability is limited to the business as a separate legal entity, providing more protection to the owner’s assets.
2. Financing and business credit are harder to procure
Securing financing and business credit can be more challenging for sole proprietorships compared to corporations, as incorporated businesses have a legal distinction that sole proprietorships lack. This can make it easier for corporations to raise funds and become eligible for government funding, while sole proprietors may face difficulties in securing financing. However, there are still financing options available to sole proprietors, such as personal loans or alternative lenders.
3. Unlimited liability
A sole proprietorship’s biggest drawback is the unlimited personal liability that extends to both the business and the owner’s assets. In the event of a debt or litigation, creditors can seize savings, properties, vehicles, and more. Therefore, when registering your business, it’s crucial to consider getting insurance to protect yourself from unforeseen circumstances.
4. Raising capital can be challenging
When starting a sole proprietorship, you’ll enjoy lower startup costs than other business structures. However, because you’re personally responsible for business debts, raising capital may prove difficult and could even limit your growth potential. As the sole proprietor, you’ll also need to cover all expenses such as suppliers, overhead, and labor costs, which can tie up or limit your assets. This is one of the significant disadvantages of sole proprietorships as it puts your finances at risk.
5. Lack of financial control and difficulty tracking expenses
Maintaining financial control is crucial for any business, and sole proprietorships are no exception. While the low startup costs and simple structure are appealing, sole proprietors should be aware of the risk of losing track of financial transactions. With one person managing all aspects of the business, including accounting, marketing, and strategy, it can be easy to overlook the importance of proper bookkeeping.
Failing to separate business and personal finances can confuse and lead to missed expenses, profits, and losses. This, in turn, can create significant challenges during tax time. Sole proprietors need to establish good financial habits, keep accurate records, and consider hiring a professional bookkeeper or accountant to ensure financial stability and avoid potential problems down the road.
Requirements for sole proprietorships in different provinces
Registering a sole proprietorship in Canada requires filling out a form and paying a nominal fee, with slightly different requirements depending on the province. In Ontario, registering is not necessary if you use your name, but a separate legal name requires legal identifiers like Inc. or Corp. to be excluded. Alberta requires proof of no partnerships or identical names and a Declaration of Trade Name. A NUANS search is optional in Ontario and Alberta, while in B.C., a name search is mandatory, and three name choices can be provided.
When should I incorporate my business?
Incorporation can be the turning point when the drawbacks of a sole proprietorship overshadow the benefits. By incorporating your business, you transform it into a separate legal entity, which offers limited liability and better financing opportunities. This can make a significant difference in the success of a startup. In essence, incorporating your business or cooperative comes with a host of advantages.
Whether you’re considering incorporating or registering as a sole proprietorship, Ownr can assist you in making the process seamless.