Sole Proprietorship: Pros and Cons

Terms: Sole Proprietorship, side hustle, independent contractor, self employment tax

So you’ve started a side hustle! Congratulations! This is an exciting opportunity and a great way to make some extra money. Maybe instagram, tick tock, or youtube has paid you for some content, you sold some great t-shirts or artwork on etsy, or started driving for uber or lyft. Making money on the side (also known as a side hustle) is a significant first step in your entrepreneurial journey. Without doing anything else, you’ve formed a business structure known as a sole proprietorship, maybe without even knowing it! In this article, we'll explore what a sole proprietorship is and delve into the pros and cons associated with this business structure.

So what is a Sole Proprietorship?

A sole proprietorship is the simplest form of business organization. In this structure, a single individual owns and operates the business, making it an attractive option for those looking to start small enterprises. There is very little you need to formally do, simply start making money! You see a sole proprietorship doesn't create a separate legal entity from the owner, the business and you, as the owner, are one in the same. In fact you don’t even need to name the business. (But if you do name it, look for our article on naming your business)

Pros of Operating as a Sole Proprietorship:

Simplicity and Low Cost:

Setting up a sole proprietorship is straightforward and usually involves minimal paperwork. This simplicity translates into lower startup costs, making it an accessible option for individuals with limited resources.

Direct Decision-Making the “independent contractor”:

As the sole owner, you have full control over all aspects of the business. This autonomy enables quick decision-making without the need for consensus from partners or shareholders. You are what as known as an independent contractor.

Tax Advantages:

Filing taxes as a sole proprietor is relatively simple. All the income you earned will be reported on your personal tax return, so there is no need for a separate filing.

Cons of Operating as a Sole Proprietorship:

Personal Liability:

A key drawback of a sole proprietorship is that the owner has unlimited personal liability. This means that personal assets are at risk in the event of business debts or legal issues, putting individual finances on the line.

Limited Access to Capital:

Sole proprietors may find it challenging to raise capital compared to businesses with multiple owners. Securing loans or attracting investors can be more difficult, potentially limiting business growth opportunities. Any loan will to start or run your business may need to be in you personal name.

Higher Tax Rate:

As a sole proprietor the entire net income of your business will be subject to “self employment tax.” This is a necessary step in earning extra income and one that should be properly planned for.

Be sure to check out: Paying taxes on money earned outside your “job”; naming your business

Questions on weather a sole proprietorship is right for you? What other options are available? Or other considerations you should be thinking about: See my contact page!

Disclaimer: this article is for informational, educational, and promotional purposes. It does not constituent legal or tax advice, nor creates any attorney client privilege.

Written by Nathan Harding, February 2, 2024. Nathan is a small business owner and attorney practicing in Massachusetts with a wealth of experience in the small business and self employed space. He has over ten years of experience in government, education, military and startups.