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Is a Sole Proprietorship Right for You? Here's How to Tell

7-minute read

A man searches for information on a laptop.
Ed Grasso

Ed Grasso

13 May 2021

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You’ve got a talent. A passion. A great idea that keeps bouncing around in your head, trying to get out. You want to do something that’s all your own — something you’ve watched other people do and felt you could do even better.

We get it. You want to start your own business.

But maybe you’re unsure of the first step, or you’re turned off by the thought of completing forms and filing paperwork. Maybe the whole thing is just too complicated.

It doesn’t have to be. Especially if you start out as a sole proprietor.

Four Signs You Should Set Up a Sole Proprietorship

1. You want to see if your business idea will work.

You know those cookies you make that disappear in seconds at every party and family gathering? How many times have you looked at that empty plate and thought, ”Hmm, I could make a fortune selling these.”

Then as you think more about it, questions around timing, location, competition, and how much you can afford to invest start to creep into your head.

That’s where a sole proprietorship can help. Starting as a sole proprietor can be as simple as just starting work. That’s one of the big advantages — you generally don’t have to register or formally declare that you’re in business. Plus, in many cases you can start in your home, garage, or kitchen.

Depending on what you do and where you do it, you may need certain licenses, permits, or other approvals and certifications. Still, a sole proprietorship is a quick, low-commitment, and relatively inexpensive way to see if your business can succeed.

2. You’re aware of your liability.

As a sole proprietor, you are the business and the business is you. That’s great from a profit point of view — the profits belong to you. At the same time, you’re personally responsible for anything that goes wrong.

That means if there’s a claim against your business, assets such as your home, car, or savings could be taken to satisfy the claim.

For example, a tree service runs the risk of bodily harm or property damage if an accident occurs. On the other hand, selling cookies typically has a lower risk of those scenarios.

Generally speaking, if your liability risk is lower like the cookie venture, then it can be worth looking at a sole proprietorship — especially considering how easy it is to get started and that you will keep all the profits.

While liability is something to consider, it doesn’t have to keep you up at night. Having the right sole proprietor insurance can take away a lot of worry. At Simply Business, we work with many sole proprietors in a wide variety of businesses and trades. We can often find general liability policies starting as low as $25.95/month.*

We know what keeps you up at night, and we’re experts at getting you the right coverage, the right price, and more restful sleep.

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3. You’re willing to think big but start small.

Wait a second! People love my cookies. Wasn’t the whole idea to build a successful business?

Absolutely, but when it comes to growth, it should be well-paced and steady. In fact, one of the main reasons new businesses fail is growing too fast and not being able to handle it.

For instance, what if a whole lot of people like your cookies a whole lot? Can you make enough of them in your kitchen, or will you need more space and commercial equipment? Also, being the good baker that you are, you’re only one person. You’ll likely need to hire employees as your business grows.

By the way, something to keep in mind if you’re looking for an extra hand or two is that, for the most part, your spouse can work in a sole proprietorship without being considered a partner in the eyes of the IRS (just as long as one of you is the sole owner of the company).

Starting small can help you find ways to work smarter. It also can keep expenses low and save more of your profits to invest in the people and equipment you’ll need to grow your business.

Speaking of profits, here’s another reason to consider a sole proprietorship. Generally, only the profit from your business is taxable, and it can be included as part of your personal tax return, and taxed at your personal tax rate. You don’t need to file a separate return for your business.

Keep in mind that you’ll still have to pay the full self-employment taxes (Medicare and Social Security).

One more thing, as a sole proprietor, you will likely be able to deduct the cost of health insurance for yourself, your spouse, and any dependents. However, it’s a good idea to check with an accountant or other tax professional regarding what’s pertinent for your particular business and financial situation.

4. You have a small customer base.

Many small businesses start out with a great product or service, but not a lot of customers early on. For instance, you know those cookies of yours are fantastic. Your friends know that as well. Other than that, though, you may not have a lot of market penetration.

Not to worry. As a sole proprietor, you can begin by selling to friends and family and getting referrals from them. It’s a good way to see how well you can expand your business while minimizing financial risk.

That can help your business grow while also giving you enough time to try other ways to expand your customer base. Maybe it’s through social media, participating in local business events, or building your website.

Marketing can be the pipeline to fuel your business, so you should think about how to devote the time to do it right.

Remember, as a sole proprietor, you’re likely the one who’s doing everything. You’re also the only one keeping your dream alive. So while you want your business to grow and thrive, you don’t want to burn yourself out in the process.

All the Signs Are There, But…

OK, maybe you’re still wondering if a sole proprietorship is right for you. Perhaps there are still some nagging issues you can’t seem to shake. We understand that. Let’s take a closer look at three other concerns business owners have when considering a sole proprietorship.

1. Funding

While a sole proprietorship can be the easiest, most affordable way to start your business, it’s usually much better when you have some cash to invest in it.

You may find your friends and family willing to invest in your business. This is a popular funding source for many sole proprietors. However, there are a number of factors to consider if you go this route, it’s helpful to do some homework before you start asking for or accepting money.

The Small Business Association also can be a good source to check out. They work with lenders to make it easier for small businesses to get loans.

There are also grants for small businesses. A good place to start is Grants.gov. It’s a comprehensive database of grants administered by various government agencies, such as the U.S. Department of Education and the Department of Veterans Affairs.

The good news is that if you’re starting small and slow, you don’t need a lot of capital to get things started and keep them going. So funding your business yourself can also be a viable option.

As a sole proprietor, you control when you work, how you work, whether you focus on improving production (more cookies!) or reaching new customers (hey, cookie lovers!). So it’s possible to work your small business around a day job. That can help you maintain regular income and other essentials, such as healthcare coverage, while your business gets started.

This approach, often referred to as “bootstrapping,” can make it possible to use your business profits to fund your business growth. While growing a business this way may require more time, you won’t be beholden to friends, family, or other investors. You remain the captain of your dream.

2. Failure

Even if you’re starting small and limiting your risk, having your own business can feel like you’re jumping into shark-filled waters. You can take some comfort in the fact that many business owners feel that way when they start.

It also can help to look at failure as part of success and not a final result. Thomas Edison famously said, “I have not failed 10,000 times — I’ve successfully found 10,000 ways that will not work.” In addition, research shows that the chances for success increase for entrepreneurs who fail in their first attempt.

3. Going it alone

There’s an expression from the franchise world about running your own business: “You’re in business for yourself, but not by yourself.” While a sole proprietorship gives you complete control to chart your success, there are times when being the CEO, the sales director, the chief of manufacturing, and the head of IT can feel like a lot for one person.

Thanks to the internet, you can be in business for yourself without feeling like you’re alone.

Wondering how to put together a business plan? Looking for ways to market your business? Questions about quarterly tax payments? What you need is probably just a click or a search query away.

Seeking out groups on social media can also be an easy and effective source of information and advice. It’s also a good way to connect with fellow entrepreneurs in your area and in your line of business. It can be very helpful and motivating knowing there are other business owners going through what you’re going through.

There’s also a wealth of information for sole proprietors from the Small Business Administration, as well as right here at Simply Business.

Ready to Get Down to Business?

Even the most confident and well-prepared business owner is taking a leap of faith when they set out on their own. However, starting as a sole proprietor can make that leap a little bit shorter.

As we’ve mentioned, a sole proprietorship is the easiest and fastest way to start off, which is good, because sometimes getting started is the hardest part. As with any business, a sole proprietorship comes with pluses and minuses.

But just as your cookie business might outgrow your home kitchen, your business may outgrow being a sole proprietorship. That’s perfectly fine. Amazon started out in a garage and held meetings in (ironically) a local bookstore. As you grow, you can consider other business structures that might work better for you, such as an LLC (limited liability company) or incorporated business.

One more thing to consider as you consider starting your business: according to the “Millionaire Next Door” by Thomas Stanley and William Danko, “Self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.”

That’s not a bad group to be a part of.

* Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on January - December 2020 data of 10% of our total policies sold.

Ed Grasso

Written by

Ed Grasso

As a 9-year-old at summer camp, I hated it — especially after being pulled screaming from the pool during the swimming competition. While this left me without an aquatic achievement patch, it also inspired the letter to my parents that got me an early release from Camp Willard. That showed me the power of writing. I’ve done my best to use it only for good ever since, such as writing for small business owners.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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