That’s a common question that faces many entrepreneurs when starting their own business, and it’s one of the very first decisions they have to make. In other words, they wonder if they should form a sole proprietorship or a partnership. If this is your case and you are starting a business, the following lines will help you decide if a sole proprietorship is the right choice for you.
Many small business owners prefer to maintain complete control over their business in the form of a sole proprietorship. A sole proprietorship is a formal business owned by one person, which offers certain benefits that other business types (like partnerships or corporations) do not provide. Sole proprietorships are easy to set up, do not have to be registered with your state’s Secretary of State, and have far fewer regulations in terms of setting up stockholders and a board of directors. Still, it is important that business owners think long and hard if a sole proprietorship is right for them and their business. Let’s take a look at some hypothetical scenarios to see when a sole proprietorship is a great option and others where it may not be feasible.
Ron has had a passion for creating unique t-shirt designs for many years. He typically wears his designs himself, and he has received many compliments from friends and strangers on how great his t-shirts look. This gave Ron the idea to start printing his designs on t-shirts and selling them online. Ron wants to start selling as soon as possible and wants to maintain complete control of his printing process, profits, and work schedule. In this case, a sole proprietorship would make a lot of sense. He would not need to formally register his business in his state (which would take quite a long time) and would answer to no one but himself. For business owners wanting independence and quick startup times, sole proprietorships can be a great option.
Birth of a Bakery
Mary has been baking cakes for her family and friends for many years, and she wants to take her baking skills to the next level and start her very own bakery. Unfortunately, Mary has a bad habit of maxing out her credit cards and is frequently late on her student loan payments. As a result, Mary has a very poor credit score. While this will obviously affect many aspects of Mary’s life, it will make a sole proprietorship very difficult to pursue. With sole proprietorships, the business’s financials are tied directly to the owner’s. That means that when the owner has bad credit, so will the business. A business with bad credit will face a couple of different problems. Any type of business loan will be very hard to get, and even if she gets accepted for a loan it will likely be on unfavorable terms. It will also be very difficult to sign a lease on a building for Mary’s future bakery. For business owners with credit issues and other financial troubles, a sole proprietorship may not be a good option.
Who Wants to Be a Millionaire?
Jeremy has dreamed of making it big. He has always been great with computers and wants to start a computer manufacturing company. Jeremy has very lofty goals and aspirations. So much so that Jeremy wants to eventually become a millionaire. There a couple of problems with a sole proprietorship in this situation. While sole proprietorships do tend to pay fewer taxes, this is mainly because they tend to make much less money. This makes perfect sense when you think about the resources that multi-million dollar corporations have access to. It can be very hard to do everything yourself, especially in a complex field like computer manufacturing. In many cases, the safest and most lucrative option is to have such a great concept or business plan that you can get investors or other partners interested in pooling resources to start the company. So while there is nothing wrong with dreaming big, business owners should be realistic and consider whether or not they can truly create the type of business and amount of profits they want using a sole proprietorship. Keep in mind however that you can always start as a sole proprietorship and seek other shareholders or partnerships once you want to expand your business. For those with bigger goals and more complex business ideas, a sole proprietorship may not always remain the best option.
These are only a few situations that could arise when considering a sole proprietorship. For more information, keep reading this article at Camino Financial on how a sole proprietorship compares to a partnership and the pros and cons of each.