A sole-proprietorship exists when a single individual owns a company. This ownership style gives full control to a single person, allowing him to set the vision for the company and enjoy the significant tax benefits associated with a sole-proprietorship. Unfortunately, the potential for severe liability and the inability to find willing investors makes a single owner style of business less popular and it can keep the business from growing.
Advantage: Full Control
By its definition, a sole-proprietorship is owned by a single individual who is responsible for the long-term decisions and goals of the company. This gives the business two unique advantages. First, a sole-proprietorship has a singular vision for the future of a company. This cuts down on the confusion and disagreement that can occur when there are multiple owners. In addition, having a single owner ensures that business decisions are addressed and answered quickly, rather than waiting for a unified decision by a board or group of owners.
A sole-proprietorship has significant tax advantages over a multi-owner business model. As an example, in many states a sole-proprietor can claim her business taxes as part of her individual taxes each year, ensuring that the company is only taxed once. Multi-owner business models are taxed on income coming into a business and again as income is paid to employees throughout the company. The result is a significant decrease in the overall tax burden that a sole-proprietor suffers each year.
Under a sole-proprietorship, the owner of a business is personally responsible for all debts and financial liability that the company takes on. This includes being personally responsible in the event of a lawsuit or legal penalties. These legal liabilities constitute a significant risk to a sole-proprietor and the potential for substantial debt in the event of an unfavorable legal decision. In addition, a sole-proprietor can be held personally responsible for these debts, placing his personal financial situation in jeopardy.
Investors are unlikely to look at sole-proprietorships as a form of investment. The inability to have a say in the regular functions of a single owner business is a strong deterrent to an investor. Additionally, if the owner decides to close the doors and stop doing business, the company is dissolved. Investors have no protection against an owner who chooses to walk away from a company and no legal recourse to keep the business going. Further, this potential plays a negative role in a company’s speculative performance.