6 Advantages of a Sole Proprietorship

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Have you reached the stage in your side hustle or entrepreneurship that you’re ready to form your company officially? If the answer is yes, you’re probably trying to figure out what business structure is best. The options run the gamut. From partnerships to LLCs and proprietorships, it’s a tough decision to make with long-term financial implications. 

Sole proprietorships are the most straightforward and beneficial for those new to entity formation. Don’t believe us? Check out these six advantages you won’t want to miss out on:

1. Formation is a Breeze

Your business needs no legal agreements as a sole proprietorship since it is you. You run the business as you see fit, and all profits and liabilities are your responsibility. You don’t even have to keep your company finances and personal accounts separate or submit an operating agreement to the state. However, it’s wise to keep things separate should you ever face an IRS audit. 

2. You Control Your Business’s Direction

Besides being simple to set up, a sole proprietorship is more straightforward to run than LLCs and partnerships. As the only member of your entity, you don’t have to hire a registered agent as an LLC must. You also won’t need to name company officers since you are the sole owner with total control over every aspect of how your company operates.

3. Business Taxes Are Far Less Complicated

Simplicity is the primary advantage of forming a sole proprietorship over other entity structures. Federal tax requirements are much easier to navigate since you won’t need to obtain an employer identification number (EIN). This means that come tax time, when everyone else is filing a separate business return, you can simply include your profits and losses on your income tax forms.


4. Business Insurance Will Protect Your Company

While your risk burden is significantly higher than that of an LLC or corporation, insurance for sole proprietors can address these liabilities. There are several coverage options you can purchase to protect your assets from loss, personal injury claims, commercial vehicle accidents, etc. 

Many insurers offer a comprehensive business owner policy (BOP) that can bundle several of these coverages into a single package. As a result, you should be able to negotiate a lower price on your premiums when combining insurance options, too.

Curious about the options available to ensure your company? Below are the most commonly offered policies: 

  • General liability: When a customer, visitor, or other individual gets hurt on your property, who isn’t an employee, this insurance covers everything from medical costs to legal fees associated with a personal injury suit. If your business equipment suffers damage or vandalism, this policy will also compensate you for the cost of repairing or replacing these assets.
  • Workers’ compensation: If you have employees, most states will require you to maintain this coverage to pay for any workplace-related injuries or illnesses they might sustain on the job. This includes the legal costs of defending against negligence claims by a team member.
  • Professional liability: Sole-proprietorships that run businesses offering professional services need additional protection against negligence claims because of errors causing a customer severe damages. Should a client sue you for causing an audit on their taxes because of an accounting mistake, this policy will pay for your attorney costs, court fees, and any awarded compensation on your behalf.
  • Cyber Liability: When data breaches occur, thousands of your customers could have their private information stored on your servers sold and exploited. If this happens, your company could get sued for related financial damages caused by their identities being stolen. These policies also provide crucial support to help you deal with the aftermath of hacking and ransomware attacks. 
  • Commercial Auto Coverage: Insurance for your company vehicle or entire fleet requires enterprise-grade coverage. Personal insurance is designed to only cover a single car for non-business use since the risk involved is not as high as commercially operated ones. If employees drive your fleet, this insurance will also cover the damage they cause and their transport product.

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5. No Registration Fees

One of the downsides to starting an LLC is the significant startup fees you must pay upfront. These costs range significantly higher when creating a partnership or corporate entity structure. On the other hand, if you don’t have a lot of capital to work with, sole proprietorships are convenient because there aren’t any registration fees. 

You still need to acquire necessary permits and licensing and pay your taxes, but this is expected no matter what type of business you create.

6. Financials Are Easier with Sole Proprietorships 

Another advantage of being a sole proprietor is avoiding complicated financial matters such as paying partners their share of your revenue, filing a separate business income tax return every year, paying quarterly taxes to your local government, etc. 

With all of this said, it can be helpful to keep your personal funds and those from your business separate. It makes things easier when tracking expenses and gauging your overall profitability. 

The Final Verdict on Sole Proprietorships

Business startups looking to maximize their early budgets may find that a sole proprietorship is the best way to launch their first endeavors. While this model does put more risk on the shoulders of the company owner and their personal assets, liability insurance can address this vulnerability. More importantly, because registration isn’t necessary, one can choose to create an LLC or corporation later without extensive backtracking of paperwork.