Benefits of sole proprietorship: the top advantages

Sole proprietorship is a specific legal term used to describe an unincorporated business owned by a single person. There are many benefits of sole proprietorship. It is the simplest and most straightforward of all the business entities. It is also the most common type, and it offers significant advantages.

If you’re considering starting your own new business and you’re trying to decide between sole proprietorship and other business structures, here’s what you need to know.

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What is a sole proprietorship?

Of all the different business structures available — sole proprietorship, partnership, limited liability company, and corporation —a self-employed sole proprietorship is the one that is easiest to establish and operate. It provides the individual owner with total control of how they operate their business, with nobody to report to or to whom they need to justify any of their decisions. All the profits of the business go directly to the owner. Read our guide on how to pay yourself as a sole proprietor.

There are no stakeholders other than the single individual who owns the business, though a sole proprietorship can hire employees. Examples of sole proprietorships can be:

• Retail shops
• Home-based businesses
• Consultancies
• Professional service providers
• Freelancers

In all cases, the owner is inextricably linked and associated with the business itself. The two are as one.

Sole proprietorship as a pass-through business structure

Sole proprietorships provide no separation between the owner and the business, either from a tax perspective or a personal liability perspective. Sole proprietorship businesses operate as pass-through entities. This means that all revenue and profits belong to the owner and get reported on their personal tax return.

Not only is the owner directly responsible for paying and filing taxes on the business’ income, they are also responsible for paying all employee wages and have no personal protection from their business's debts or legal liabilities.

Simple setup as a top reason to choose sole proprietorship

There are few things more exciting than opening your own business, but the prospect of doing so can also be daunting. For some, entrepreneurship was never an if or a what, but rather a when. They have a skill or an idea and simply need the running room and the opportunity. Others have long wanted to be their own boss — or may have an absolute aversion to working for somebody else — but don’t even know how to start or what service or product to sell.

Sole proprietorship as a business structure with no legal paperwork required

Whichever of these scenarios best describes you, once you’ve overcome your initial obstacles and are ready to start, your next step is to choose a business structure. Choosing sole proprietorship as your business structure offers tremendous simplicity and ease. From a paperwork perspective, sole proprietorship requires absolutely no formal action. There are no contracts, agreements, or registrations outside of the appropriate licenses associated with your operation or industry. That means no additional costs and more money in your pocket.

Other businesses require contractual agreements

By comparison, a written agreement is highly recommended (though not required) when forming a partnership to formalize the management and contributions of money, profits, and responsibilities.

Forming a limited liability corporation from a sole proprietorship or by itself requires that articles of the organization be filed with the state in which you operate, and an operating agreement is highly recommended. Incorporation requires principals to formally register articles of incorporation with the Secretary of State where your business operates.

Avoiding all of these complications is particularly advantageous if you are starting your business as a test run or are operating it in addition to having responsibilities elsewhere. You can start a sole proprietorship without spending too much time on bureaucratic tasks not associated with the business itself.

Operate your sole proprietorship under your personal name

Some entrepreneurs spend hours dreaming up the perfect business name, but if you’re not hanging out a shingle or a sign above a storefront, having a novel name may be of little interest. As a sole proprietorship, you can simply use your personal name as your business's legal name, and that saves you from having to register a business name at the trademark office or file a Doing Business As with your local administration. It also saves you from the fees associated with each of these processes.

Sole proprietorships don’t pay business taxes

Because sole proprietorships are the same legal entity as their owners, the Internal Revenue Service treats them as pass-through entities. They pay using the owner's Social Security Number and do not need to use an employer identification number unless they have employees. The business pays no separate taxes. All income is reflected on the owner’s personal tax return and reported on their individual IRS 1040. Sole proprietors pay a tax rate lower than that of any other available business entity type.

When a sole proprietorship is prepared to file taxes, they use a Schedule C to reflect all of their business’s income, expenses, and losses. They then transfer the pertinent total into their personal tax calculation and pay any taxes due accordingly. Notably, these owners are required to pay self-employment taxes and to submit quarterly estimated income taxes.

Can sole proprietors have employees?

Just because the name of the business entity includes the word “sole,” you’re not required to operate it all by yourself. A sole proprietor can hire as many employees as they like to help them run their business. Of course, when they do so, they are personally responsible for paying wages, providing benefits, and withholding appropriate taxes on behalf of their employees.

Every sole proprietor is their own boss

Probably the single most important part of choosing to be a sole proprietorship is the ability to have complete control over every aspect of the business. Whether you’re a small business owner or your sole proprietorship grows to include multiple locations and hundreds of employees, as long as you continue to operate as a sole proprietor you are able to be the sole owner or decision-maker.

You can take time off whenever you like. Make your own hours and devise your own operational and marketing strategies without fear of criticism or correction. When you make mistakes, you have nobody to blame but yourself. If you dislike taking direction, suggestions, or criticism, you likely view the risks as worth the reward.

If you are looking to start a sole proprietorship, check out the best businesses to start with 5k.

What are the disadvantages of being a sole proprietor?

Put simply, there are strengths AND weaknesses to a sole proprietorship. It would be a mistake to choose a sole proprietorship as your preferred business structure based strictly on the advantages that it offers. Smart entrepreneurs make sure they’re as aware of the cons as the pros of every decision that they make. As attractive as a sole proprietorship may be, there are several reasons to bypass its ease and opt for another entity type.

Lack of legal separation means your personal assets are on the hook

It’s tempting for a budding entrepreneur to make important business decisions based on assumptions of success, but not every small business succeeds, and not every entrepreneur’s story has a happy ending.

If a business fails to thrive, it may be left with big, unpaid bills for equipment or inventory. The owner may have signed a lease they can no longer afford, owe sales tax, or be committed to a business contract they are unable to fulfill. Without the liability protection offered by other business structures, a sole proprietorship business owner is personally on the hook for every commitment — to an unlimited degree.

No liability protection

Even more frightening is the fact that a sole owner is legally responsible for other liabilities that are assigned to their business. To get a sense of exactly what that means, imagine the owner of a restaurant or small retail shop where a customer or employee slips, falls and suffers serious personal injuries, or a business whose employee commits some type of negligent or irresponsible act that causes harm.

If the injured individual files suit seeking compensation for the damages they’ve suffered, the sole proprietor is personally responsible and faces the risk of losing their personal assets.

By comparison, business owners or sole proprietors who opt for a limited liability corporation or a corporate structure can see their business named as the subject of lawsuits or debts without risking their life savings. The business is a separate legal entity. The sole proprietor is personally responsible for non-compliance with laws and regulations. Citations and criminal charges are attached to their name, not their business.

Read more about a sole proprietorship vs a single member LLC.

Difficulty for sole proprietors to raise capital for their business

Every business has its own capital requirements. A freelancer or consultant operating their business as a side gig may need nothing more than their laptop and phone to get started, while an aspiring coffee shop owner will need espresso machines, refrigeration, and a place to put them.

The more equipment and investment is needed, the more of a challenge it may be to remain within the framework of a sole proprietorship, as sole proprietorships have no stock or equity to sell.

In most cases, sole proprietorships rely on whatever cash savings they have available to them or loans from family members or friends. They may be able to take out a loan, but it would be in their own name and the terms would be dependent upon their credit rating and the risk perceived by the lender.

The owner might need to put up their personal assets as collateral, creating a real risk to their personal credit if the business fails and they find themselves unable to repay their debt.

What happens to a sole proprietorship when the business owner dies?

No matter how successful a sole proprietorship business may be, should the owner die or for some other reasons become unable to continue, the business ceases to be. Where partnerships, limited liability corporations, and corporations each have structures that allow a business to continue existing, a sole proprietorship’s identity is directly tied to its owner.

If that heading seems familiar, it’s because you saw it earlier in this article, under the larger category of “advantages” of a sole proprietorship. For all of the freedom and satisfaction that comes with being independent of supervision, there are also significant stressors and burdens that come with being the boss.

In addition to having to pay self-employment tax, every decision and its outcomes rest entirely on the owner’s shoulders, as do all responsibilities. Unlike other business entities set up as partnerships, sole proprietorships that operate on their own may find it challenging to take time off. Even having trusted employees often does little to alleviate this dynamic.

Losses pass to the business owner just as income does

Running a business is not always a high-pressure situation, but it can be. While success is the goal, it is not guaranteed. Just as with the business's liabilities and income, a sole proprietorship’s failure passes directly to the owner.

Advantages of sole proprietorship to easily shift to other business structures

If you are embarking on your own entrepreneurial journey, the benefits of a sole proprietorship are undeniable. The structure allows the fastest, easiest, and least expensive entry point to business ownership, with very few downsides.

One last consideration to keep top of mind is that sole proprietors have significant flexibility. As you become more established and profitable you may wish to expand the scope of your business. Likewise, concerns about personal liability or the need to attract capital investment may become a greater concern.

As the only decision-maker of a sole proprietorship, you will be free at any point to move your business from its unincorporated model to whatever type of legal entity is most appropriate and advantageous.

Sole proprietorship as a perfect jumping-off point

Starting your business venture as a sole proprietor and building a successful entrepreneurial track record gives you all the advantages of independence and simplicity along with the benefit of accumulating financial records and sales data that can help you attract partners, investors, and stakeholders in the future.

Top 10 advantages of sole proprietorship

complete control over business decisions

A sole proprietorship gives you full control over every business decision without needing approval from partners or a board. This allows you to act quickly and adapt your business strategy as market conditions change.

For example, if you run a freelance graphic design service, you can immediately decide to raise your rates or switch software tools without delay. This flexibility helps you stay competitive in the fast-moving freelance economy of 2024.

To take advantage of this, keep clear records of your decisions and review your business goals monthly. This habit ensures your control leads to smart, timely actions that grow your business.

easy and inexpensive to form

Starting a sole proprietorship requires minimal paperwork and low startup costs compared to other business structures. You often only need to register your business name and obtain local permits.

For instance, in most U.S. states in 2024, registering a sole proprietorship costs between $50 and $150. You can often complete the process online through your state’s business portal. There are no fees for creating corporate bylaws or issuing stock.

To save time and money, use platforms like LegalZoom or your state’s official website to handle registration quickly. This simplicity makes sole proprietorships ideal for freelancers and small business owners starting with limited budgets.

simple tax preparation and filing

Sole proprietorships file taxes using Schedule C with your personal Form 1040, which simplifies tax preparation. You avoid the complexity of corporate tax returns and double taxation.

For example, if you earn $60,000 in 2024, you report your business income and expenses directly on your personal return. This reduces accounting costs and allows you to use tax software like TurboTax Self-Employed or QuickBooks Self-Employed for easy filing.

To maximize this advantage, keep detailed expense records throughout the year and consider quarterly estimated tax payments to avoid penalties. This keeps your tax process smooth and compliant.

privacy and minimal public disclosure

Sole proprietorships generally have fewer public disclosure requirements than corporations or LLCs. Your personal information is not widely published, which helps maintain privacy.

Unlike corporations that must file annual reports with detailed ownership information, sole proprietorships typically only need to register a DBA (doing business as) name if applicable. This keeps your personal data off public business registries.

To protect your privacy further, consider using a business mailing address or PO box instead of your home address. This simple step helps separate your personal and business lives.

flexible business management and operations

Managing a sole proprietorship is straightforward because you are the sole decision-maker, allowing you to change business practices quickly without formal meetings or approvals.

For example, if you want to expand your freelance writing services to include editing, you can start offering this immediately without amending any partnership agreements or corporate bylaws.

To leverage this flexibility, regularly assess your market and client needs, and be ready to pivot your offerings. This agility is a key advantage in today’s dynamic gig economy.

fewer regulations and compliance requirements

Sole proprietorships face fewer government regulations compared to corporations or LLCs. You avoid complex compliance tasks like holding annual meetings or filing extensive reports.

For instance, you won’t need to comply with Sarbanes-Oxley Act requirements or maintain corporate minutes, which reduces administrative overhead and costs.

To benefit from this, stay informed about local business licenses and tax obligations, but don’t worry about corporate formalities. This keeps your focus on growing your business.

all profits go directly to the owner

In a sole proprietorship, you keep 100% of the profits after expenses, unlike corporations that distribute dividends or share profits with partners.

If your business earns $100,000 in net income in 2024, that full amount belongs to you, which can improve cash flow and personal financial planning.

To maximize this advantage, regularly review your expenses to ensure profitability and consider setting aside funds for taxes and reinvestment.

easy dissolution process

Closing a sole proprietorship is simpler than dissolving a corporation or LLC. You generally just stop operating and notify relevant tax authorities and vendors.

For example, if you decide to retire or change your business model in 2024, you can close your sole proprietorship by canceling your business licenses and filing a final Schedule C with the IRS.

To ensure a smooth closure, settle all outstanding debts and notify clients and suppliers in advance. This prevents legal complications and protects your credit.

no separate corporate tax

Sole proprietorship income is taxed once on your personal tax return, avoiding the double taxation faced by C corporations in 2024.

This means your business profits are only subject to personal income tax rates, which can be more favorable depending on your income level and deductions.

To optimize your tax situation, track deductible business expenses carefully and consider consulting a tax professional to leverage credits and deductions.

no unemployment tax on the owner's salary

As a sole proprietor, you do not pay unemployment taxes on your own income because you are not considered an employee of your business.

This reduces your overall tax burden compared to corporations that must pay federal and state unemployment insurance taxes on employee wages in 2024.

To take advantage of this, ensure you correctly classify your income and maintain clear records separating business profits from personal withdrawals.