As most entrepreneurs will tell you, there is nothing more satisfying than running your own business. You make your own decisions, work your own schedule and choose your own clients, with nobody but yourself to tell you otherwise.
Despite this sense of freedom, however, being a sole trader is not easy. Business models have undergone drastic shifts since the last century and, especially given the complexities of the digital revolution, the concept of owning and managing a company today is entirely different from twenty – or even ten – years ago.
Therefore, before committing to the sole proprietor ownership model, it is necessary to review its pros and cons. From the tax and regulatory benefits, to the drawbacks of minimal investment, here are the key advantages and disadvantages of a sole proprietorship.
The Advantages of Sole Proprietorship
To put it bluntly, no other business structure will offer you as much control over your enterprise as a sole proprietorship does. There are no compromises to be made with other partners or stakeholders, and everything gets done one way, and one way only: your way.
This means that you don't have to convince others of your vision, or to see your point of view; if you decide that something is suitable for your business, then you go ahead and implement the necessary processes that will enable it to perform better.
Conversely, if you think something isn't working and needs to be discontinued, you have the power to do so. Later on, if you decide that the process you implemented a year ago needs to change because you now have a better strategy, then, yes, you guessed it: you can apply it immediately without having to consult anyone.
Because you are able to make decisions on the fly and make the most appropriate implementations yourself, you get to cut the loops and chains that you cannot omit if your business had more than one owner. This enables you to respond more dynamically to market changes and streamlines the entire decision-making process, removing any waiting around when decisive action is necessary.
One of the most important and rewarding aspects of a sole proprietorship is the privilege of privacy. Since your business is run entirely by you, the confidentiality of your business remains only with you.
For example, you don't have to worry about your business plans and secrets being spilt, or a disgruntled former partner taking off and attempting to steal your clients; being the sole proprietor eliminates all such probabilities, and minimises the potential for corporate sabotage.
The more people you have on your payroll, the less your profit will be – it really is that simple. If you are the sole owner, whatever profits your business makes is for you, and you alone. You don't have to split revenue or pay off shareholders, plus the initiation and startup costs will be lower.
A business owned by a single person has fewer processes to follow when it comes to taxation. In a partnership scenario, meanwhile, the profits have first to be split between the partners and then correctly reported, making the taxation process cumbersome and rigorous.
Businesses owned by more than one person need to file annual reports with several authorities. This isn't the case when a company is run by a sole proprietor.
The Disadvantages of Sole Proprietorship
Business Becomes Personal
As the sole owner, only one person is responsible for ploughing investment into the venture: you. As a result, until your business can start generating a profit, your financial situation will be incredibly stretched.
To be a single owner means that you bear all the overheads and startup costs of your company, but the most important thing to remember is this: if your business makes losses, you will have to bear the brunt all by yourself. This is not the case in partnerships and other business ownership structures, where the load is shared, and your personal assets are legally separate from your business ones.
Higher Investment Risk
While, as mentioned, you get to keep all the profits, you will have to also invest by yourself; if you have one or more business partners, though, then you only have to invest as a partner. This means that you only put in a fraction of what you would on your own, mitigating your investment risk if things don't work out.
Remember: it's better for you and three other partners to lose $2,500 each, than for you to lose $10,000 on your own.
When you are a sole trader, you also inherit all the tension that comes with running a business. Having partners would help you ease this tension, as well as allowing you to pursue a healthier work-life balance. If you are doing everything by yourself, then there is a good chance that it will become difficult for you to manage both work and your personal life, leading to disillusionment at best and burnout at worst.
Being a sole proprietor means having the liberty to take all the executive decisions by yourself, which is a good thing – especially if you don't trust the opinions of others.
However, while you may feel otherwise, it's essential to understand that not all decisions are time-tested. You could be wrong with a particular action, for instance, and without anyone to question or filter your thought process, end up making a decision that is harmful to your business. Having somebody else on board to help you see things from a different perspective is vital, regardless of how good your intentions are.
Lack of Legacy
The business that you start might have been a product of years, or even decades, of hard work and careful development. However, if you don't have a successor, then it is most likely to die with you. In the case of having more than one proprietor, you can be assured that your business will continue to run, even after you are done with it.
Fewer Funding Opportunities
Unfortunately, investors are less likely to invest in startup businesses that have just one owner. In the case of startup funding, the general rule is that of 'the more, the merrier', especially if your senior management team has expertise in an array of areas.
It also gives investors the confidence that, even if something were to happen to you, your partners could continue to take the business forward.
As with any business model, there is absolutely nothing wrong with being a sole proprietor, while, at the same time, there is no guarantee that a business with multiple partners will be successful as well. However, it's crucial that you understand both the benefits and the drawbacks of your chosen model before you commit.
Is a sole proprietorship the right business structure for a new business? Let us know your thoughts in the comment section below.