Sole Proprietorship Advantages: Is it Right for You?

Ever thought about setting sail on your entrepreneurship journey?

This article will guide you through the advantages and disadvantages of sole proprietorships and how Wise Business has a low-cost startup account, no minimum load requirements, no monthly fees, and international benefits.

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Table of Contents
What is a sole proprietorship? Sole proprietorship advantages Sole proprietorship disadvantages Wise Business for Sole Proprietors FAQ Sole Proprietorship Advantages

What is a sole proprietorship?

A sole proprietorship is a type of business that is owned and managed by one person – no partners, no board of directors, and no shareholders to weigh in. Just one person makes all the decisions.

Sole proprietorships make up the majority of all business types – a heavy 86.6% of all businesses in the country as of 2022.¹ That means over two-thirds of the American business landscape is taken up by individual trailblazers managing their own unique entrepreneurial journeys.

Another thing to note is that this type of business is an unincorporated business structure, which means there isn’t a separation between the owner and the business.²

But like any business type, there are also advantages and disadvantages of sole proprietorships.

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Sole proprietorship advantages

It’s no secret why sole proprietorships are so popular, considering their straightforward structure, lack of legal complexity, and low startup costs. Let's jump into the sole proprietorship advantages to see how it might be the perfect pick for your business.

1. Easy to establish

Who doesn't appreciate a simple, speedy process, especially when it comes to business? How easy it is to form a sole proprietorship makes it a compelling option for many self-employed people. In most US states, you can establish your sole proprietorship with little paperwork and almost no legal formalities.

A sole proprietorship benefits many people, including those who want to get their feet wet but aren’t committed to quitting their full-time job just yet.

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2. Economic contributions

Sole proprietorships, as mentioned, are big contributors to the US economy. Even though big corporations grab most of the spotlight, most businesses are sole proprietorships.

This isn’t just significant because of their volume but also in their diverse presence across various industries – retail, real estate, health care, law, and arts, to name a few. When all these businesses are considered together, they generate a significant portion of our Gross Domestic Product (GDP).

And let’s not overlook the tax contributions of sole proprietorships. While these businesses enjoy advantages such as pass-through taxation, they still make up a significant portion of tax revenues.

3. Direct control

With a sole proprietorship, you get to single-handedly control and shape the destiny of your business. There are no board members or partners to challenge your decisions – you have the final say.

One of the biggest allures of a sole proprietorship lies in the fact that just one person is in charge. For those who prefer to work solo or oversee all their business dealings, this model is ideal. It ensures that the business is an extension of the entrepreneur, reflecting their own vision, values, and strategies.

Unlike bigger businesses, where proposals have to go through a series of departments and decision-making partners, a sole proprietor can act when they want and how they want. This can accelerate the growth of your business significantly.

4. Financial flexibility

Sole proprietorships provide an unmatched financial benefit in the form of 'pass-through taxation.³ This is where the profits (or losses) of the business pass directly to the owner and are included on their personal tax return. This gets rid of the risk of double taxation, a big problem that corporations encounter.

According to data from the IRS, more than 27 million tax returns were filed by sole proprietors in 2018.⁴ The tax benefits of sole proprietorships are hard to overlook!

5. Minimal startup costs

Another huge advantage is the minimalistic startup costs tied to sole proprietorships. Many new business owners are discouraged by paperwork and fees, but the costs associated with starting your business are incredibly low compared to corporations or partnerships. The less you're spending on starting up, the more you can invest in growing your business.

If you don’t want to operate under your legal name, you’ll need to file a DBA or "Doing Business As" name. For example, you might want your business to operate under a different moniker that describes your services, or you might just want a catchy name to appeal to your target audience. Depending on the state, DBA registration can cost anywhere from $5 to $150.⁵ 

6. Legally simplified

There's also less need for lawyers and complicated legal advice. Sole proprietorships either operate under the owner's legal name, or, as we’ve explored, simply adopt a new business name for a fee.

Minimal interactions with lawyers mean you can save on attorney fees. You also won’t have to worry about constantly keeping up with intricate legal developments, nor feel overwhelmed with all the terminology. Instead, you can direct all your energy toward growing your business.

Sole proprietorship disadvantages

While there are plenty of pros of a sole proprietorship, they aren’t free from their own challenges. Before heading down this road, let’s also take a look at the potential roadblocks that might be ahead.

1. Unlimited liability exposure

Perhaps one of the biggest cons of a sole proprietorship is the unlimited liability that the business owner faces. In this business structure, the law doesn’t distinguish between the business and the owner. As a result, the sole proprietor is entirely responsible for all the debts of the business. If your business accumulates a significant amount of debt or faces a lawsuit, your personal assets—homes, savings, possessions—are on the line.

Sole proprietorships might also find it difficult to get outside financing. Banks and grant-giving institutions often see sole proprietorships as riskier endeavors compared to corporate setups.

2. Heavy burden

Being the sole decision-maker can often weigh heavily on the owner. There's no partner to share responsibilities or bounce ideas off of, so stress and burnout can creep in. Some studies show that those who are self-employed, especially small business owners, might experience more negative stress than employed workers.⁶

3. Business continuity

A sole proprietorship lacks continuity. If the owner decides to retire, gets sick, or passes away, the business won’t continue to exist in a legal sense. This uncertainty can be challenging when it comes to business planning and succession.

4. What is the main drawback of a sole proprietorship?

While a sole proprietorship tops all business types with its simplicity, flexibility, and control, its main drawback is its unlimited liability exposure. The owner is the business in a legal sense, meaning that in case of business debts, the personal assets of the owner, such as their house, car, or personal savings, are on the line.

There's no separation between the owner and the business, which can lead to big financial risks. This merging of professional and personal liability means that if the business falls into debt or faces a lawsuit, the owner's personal assets are fair game for creditors. This financial vulnerability is definitely the biggest downside in the context of a sole proprietorship.

All these disadvantages remind us that sole proprietorships, like all business entities, come with their unique set of complexities. However, with informed decision-making, well-strategized financial planning, and partners like Wise Business by your side, these hurdles aren’t the be-all and end-all.

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Wise Business for Sole Proprietors

Starting out as a sole proprietorship can feel like an uphill battle, but thanks to Wise Business, it doesn’t have to be that way. Wise Business is ideal for the modern-day sole proprietor. Made to cater to the unique needs of sole proprietorships, Wise Business makes handling finances easy by offering an account that's light on your pocket with no startup costs, free from load requirements, and comes wrapped up with minimal pay-as-you-go fees.

Ideal for both domestic and international sole proprietors, this account offers benefits that stretch far beyond the borders of the United States. Interested? Let's explore how Wise Business could be your most trusted ally on your business journey.

Some key features of Wise Business include:
Better visibility and organization of business finances. This is helpful for account reconciliations and audits.
Administration controls for users. It’s possible to allow team members to carry out specific tasks.
Receive payments from ecommerce platforms (such as Amazon or Stripe)
Create invoices using the Wise invoice generator or invoice templates.
Features for bill payment, including a QuickBooks Bill Pay connection. Bill payments will be synced, matched, and categorized in QuickBooks for simple reconciliation.
Batch payment options. This allows the fast payment of up to 1,000 people, by uploading a spreadsheet.

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Save on fees

If there's one thing every entrepreneur values, it's finding ways to keep business costs low. One standout feature that makes Wise Business a preferred choice for sole proprietors is their commitment to minimal fees. Unlike many traditional banks that are notorious for their hidden charges and transfer fees, Wise Business operates with full transparency.

To start with, there's a one-time fee to set up your Wise Business account – and this gets you access to account details in 9 currencies. Often, sole proprietors need to make cross-border payments, whether to an out-of-country supplier or even to an account of their own in another country. Traditionally, these transactions mean you could take a hit on your wallet no thanks to uncompetitive exchange rates and high transfer fees.

Wise Business charges a small, upfront fee for international transfers and uses the mid-market exchange rate, with no markup.

So, whether you're paying a remote employee halfway across the globe or making a transaction with an international client, you can be confident that you're incurring minimum costs.

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Do business overseas

Doing business across borders is full of complexities, especially when it comes to managing finances. As we touched upon, Wise Business has set out to simplify international business for sole proprietors.

Traditionally, making international payments involved a long-winded process with hefty banking charges. With Wise Business, you can conduct overseas transactions smoothly and at a fraction of the usual cost. They use the mid-market exchange rate - the fairest there is - and charge a low upfront fee for international transfers.

But that's just the start. With your account, you can also receive payments in different currencies, like a local. The multi-currency account allows you to hold and manage your money in 40+ currencies. This lets you invoice customers in their currency, pay suppliers from the same account, and avoid unnecessary exchange fees.

Another bonus is their Wise Business debit card. This tool allows you to spend anywhere in the world at the real exchange rate, making those international business trips or online purchases more pocket-friendly.

Manage your business more efficiently

The platform also provides a clear overview of your finances, including any fees you might be charged, helping you stay in control of your spending. Having a full picture of what you’re spending not only keeps you from unpleasant surprises but also allows you to properly plan and allocate your financial resources.

The benefits go far beyond simple dashboard navigation too. Take the 'batch payments' feature, for example. With the click of a button, you can handle up to 1,000 payments at once—all in a single spreadsheet upload. So if you're an entrepreneur managing a host of freelancers, remote employees, or third-party vendors globally, you'll appreciate the convenience.

As well, Wise Business provides the ability to link your account with popular business tools such as Xero and QuickBooks. Being able to sync these up makes bookkeeping straightforward and ensures your financial records are up-to-date and ready for tax season.

Finally, the security of your finances is a priority for Wise Business. This platform offers two-factor authentication and sophisticated encryption technologies, so all your hard-earned money is safe and secure.

All in all, Wise Business isn't just a money transfer service – it's an amazing tool that can streamline your finances, making your business operations more efficient and giving you more room to focus on growing your new business.

FAQ Sole Proprietorship Advantages

What is a sole proprietorship vs. LLC?

A sole proprietorship and a limited liability company (LLC) are both business entities but differ in various ways. A sole proprietorship is the simplest and most common structure used to start a business. It is an unincorporated business owned and run by one person with no distinction between the business and the owner. It means the owner is entitled to all profits but also personally responsible for all business debts, losses, or liabilities.

On the other hand, an LLC is a legal entity created by state statute. It provides the limited liability features of a corporation - where members aren't personally responsible for company debts and liabilities - but the tax efficiencies and operational flexibility of a partnership or sole proprietorship. An LLC can have one or more members.

There are differences when it comes to liability protection, taxation, management, costs, and regulatory compliance requirements. While LLCs guard owners' personal assets, sole proprietorships don’t. Setting up an LLC also generally involves more costs and regulatory compliance compared to establishing a sole proprietorship.

What is an example of a sole proprietorship?

An example of a sole proprietorship could be a local bakery owned and managed by a single person. Let's say someone decides to open a vegan bakery in their neighborhood. As the sole owner, they take on all responsibilities of the business, including purchasing the ingredients, managing the store, dealing with customers, and handling all the financial aspects such as profits and loss. They’re also liable in the case of any debts.

Is a sole proprietor the same thing as being self-employed?

While there are lots of similarities, being a sole proprietor and being self-employed is not exactly the same thing. Self-employment is a broad term that refers to anyone who works for themselves, not for an employer. This could include freelancers, contractors, and, of course, sole proprietors.

On the other hand, a sole proprietorship is a specific type of business structure. It's the simplest form of business organization and is owned and operated by one person. As a sole proprietor, you are the business. This means the owner is personally responsible for business profits, losses, and liabilities.

So while all sole proprietors are self-employed, not all self-employed individuals are sole proprietors. They might have chosen to structure their business differently, for example, as a partnership or a limited liability company (LLC).

What are 3 sole proprietorship advantages?

One of the biggest sole proprietorship advantages is the ease of establishing one. It removes the multiple legal formalities that often come with other business formations. Entrepreneurs can start their journey with considerably less paperwork and fewer complexities compared to corporations or partnerships.

With this business structure, you'll have full control over business operations. From daily decisions to bigger strategies, business decisions are all up to you. This freedom and independence can be a huge benefit for many business owners who have a specific vision for their company.

And lastly, one of the sole proprietorship tax advantages include the “pass-through taxation.” Here, profits or losses flow directly through to the owner's personal tax return, which helps them avoid the double taxation issue that corporations face. In other words, the business itself is not taxed separately, which could mean potential tax savings.

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Sources:

1. INC
2. Wise
3. LegalZoom
4. IRS
5. Business News Daily
6. National Library of Medicine