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Benefits and drawbacks of sole proprietorship business formation

On Behalf of | Mar 10, 2020 | Business Law |

In Massachusetts, starting a business can be exciting and worrisome at the same time. People who have a product or service they want to share with the public will have much to consider as they move forward. To ensure that the business formation is done correctly and benefits the owner, it is key to know which type is the wisest choice. For those considering a sole proprietorship, it is important to know the benefits and drawbacks.

The most fundamental business formation is a sole proprietorship. It is a simplified strategy get a business off the ground. One individual owns it and there is no separation between that person and the business itself. It is unincorporated and the person bears the responsibility for everything involved including debt, loss and liability. There is no specific action needed to become a sole proprietor.

Regarding benefits of a sole proprietorship, there are several. The cost of forming it is minimal. The legal fees are limited to getting permits and licenses. The owner maintains full control of the business and does not need to answer to partners, shareholders or anyone other than the customer. All decisions are made by the individual. Taxes are relatively easy to prepare since there is no separation of taxes between the business and the owner. The rates are the lowest of all business types.

However, there are negatives. The sole proprietor is completely responsible for any issue with the business. Without the legal shield that other types of business formations provide, this can leave the owner vulnerable to liability concerns and, of course, debt. It can be difficult to raise money as a sole proprietor. There is no stock to sell meaning investors cannot derive profit from it. Banks are reluctant to lend due to the risk of the business failing. Finally, there is a significant burden on the owner as it is up to him or her to run the operation and make it a success.

Some businesses are better off as a sole proprietorship while others could do well with a different formation. Starting a business can be stressful enough without thinking about whether the preferable business type was selected. For advice in determining if a sole proprietorship is the way to go or there are better alternatives, a legal professional experienced in business formation may be able to help.