According to the U.S. Census Bureau, there are more than 18,000,000 sole proprietorships in the United States. A sole proprietorship is seen as the default method for operating a business and, given its obvious popularity, deserves some discussion regarding advantages and disadvantages.
What is a sole proprietorship?
Before delving into the pros and cons of Minnesota sole proprietorships we should start by defining what they are. Unlike a LLC, corporation or partnership, sole proprietorships are not legal entities. Instead, sole proprietorships refer to the person who owns and operates the business. Sole proprietorships can function based only on the name of the person who runs the business (John Smith) or can do business under another name (John Smith’s Coffee Shop). It’s important to understand that even if the sole proprietorship is given its own name, this does not create a legal entity separate from the owner of the business.
Advantages of sole proprietorship
The principal advantages to sole proprietorships include ease of operation and low costs. For a sole proprietorship to begin operations, the owner only needs to register the name of the entity and secure any local business licenses that are required. Because of the loose legal structure of sole proprietorships, there is no need for some of the time-consuming formalities required under other forms of business. No board meetings, no voting and no articles of incorporation.
Another benefit of a sole proprietorship is that the owner can commingle personal and business funds because all money brought into the business belongs solely to the owner. Taxes are relatively straightforward and are paid as personal income to the owner. This can save money at the end of the year when it comes time to pay an accountant.
Disadvantages of sole proprietorship
The single most important drawback to sole proprietorship is the complete legal liability of the owner. Because there is no distinction between the company and its owner, all debts taken on by the company become the personal obligation of the owner. If the company runs into trouble, creditors can sue and hold the owner personally liable for all debts associated with the enterprise.
Another downside to sole proprietorships is that it can be difficult to raise money form others. Because sole proprietorships cannot issue stock it can become difficult to seek outside capital to grow your company.
Finally, another negative associated with sole proprietorships is a lack of continuity. The owner and the business are legally one and the same which means when the owner dies, the business will become part of that person’s estate and eventually be liquidated. If you intend to create a company that will outlive you, perhaps providing for your children and grandchildren, sole proprietorships are likely not the best way to accomplish this.
It’s good to know that with the right help, establishing a Minnesota small business does not have to be a scary proposition. An experienced Minnesota small business lawyer can help walk you through the process of setting up your new company and ensure it offers the maximum benefits for your individual situation. For more information, contact Joseph M. Flanders of Flanders Law Firm at (612) 424-0398.
Source: “Advantages and Disadvantages of Sole Proprietorships,” published at NYTimes.com.
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