What is a Sole Proprietorship and Why You Should Avoid One?
Shifting Career Paths: From Employee to Self-Employed In recent years, particularly following pandemic-driven economic upheavals, many American workers are transitioning from traditional employment to self-employment. This shift is often driven by the desire to gain more control over one's career. For many, what begins as a side hustle evolves into a full-time venture. Unbeknownst to some, this journey often leads to operating a sole proprietorship. It's crucial for individuals on this entrepreneurial path to grasp the advantages and challenges of a sole proprietorship.
Evolving Employment Perceptions and the Rise of Self-Employment Historically, a full-time job was the cornerstone of a successful career. However, this perception has drastically shifted, especially among younger workers who experienced job insecurity during the Great Recession and the COVID-19 pandemic. These events disrupted traditional career trajectories and fueled the rise in self-employment. In the post-pandemicera, this trend isn't limited to those who lost jobs; many willingly have embraced self-employment during the "Great Resignation." Today, self-employed Americans constitute a significant portion of the workforce, and this trend is expected to continue growing. Self-employment is not limited to low-skilled jobs like ridesharing or delivery services. Increasingly, highly educated and skilled professionals are opting for freelance and contractual work.
Sole Proprietorship Defined A sole proprietorship is a default business structure for many self-employed individuals. Unlike corporations, LLCs, or partnerships, which may require formal state filings, a sole proprietorship is often less formal. It's recognized by the IRS when an individual operates a business under their name without registering as another entity. Sole proprietors may need specific licenses and can operate under a DBA (Doing Business As) name. However, the legal and financial identity of the business and the individual remains the same.
Benefits of a Sole Proprietorship The simplicity and low startup costs of a sole proprietorship are its key advantages. Taxes are straightforward, as profits and losses are reported on the owner's personal tax return. Sole proprietors also enjoy certain tax deductions and complete control over their business decisions. They are their own boss. Transitioning to self-employment and running a sole proprietorship involves various considerations like registering a DBA, obtaining necessary permits, setting up a business bank account, and ensuring compliance with IRS regulations. While a sole proprietorship suits certain types of businesses initially, growth and expansion may necessitate transitioning to a corporation or LLC.
Challenges of a Sole Proprietorship Despite its benefits, a sole proprietorship poses significant risks, legal and otherwise. The sole proprietor bears full responsibility for all debts and legal issues. Personal assets are extremely vulnerable in case of business liabilities. Additionally, raising capital can be challenging, which may hinder business growth. The business structure also involves paying self-employment tax, which is higher than typical employee taxes.
Seeking Professional Guidance For those considering or currently operating a sole proprietorship, consulting with business attorneys can provide valuable insights into the suitability of this structure, its benefits and limitations, and guidance on starting and growing as a small business owner. Professional advice can help navigate the complexities of self-employment and business ownership. Contact me here or call 505.585.1235 to speak with attorney Johnn Osborn at Land of Enchantment Law.
