Due to the sheer popularity of starting a business, the attitude of being self-made, and the upward trend of a recovering global economy, the term “entrepreneurship” has entered quite a frenzy as of recent, with more and more people taking that leap of faith to test their ideas in the open market. And whether that’s starting from scratch and launching their campaigns on Instagram or spending their free time building their side hustle from the ground up with the help of crypto-backed assets, the opportunities are seemingly limitless.
However, at its core, becoming a successful business owner isn’t just about selling your brand to the biggest investor in Silicon Valley or expanding your consumer demographics. The legal requirements of deciding your business structure and registering with the IRS are still there. That being the case, most newbie entrepreneurs are generally unaware of the types of organizations available. So to help increase awareness and avoid the spread of misinformation, we’ll be going over the prospect of starting a sole proprietorship in 2022.
Perfect for Small Enterprises
As the name suggests, a sole proprietorship is a type of business that’s owned by one person—you. While that may appear suspiciously simple on paper, there’s actually nothing deceptive about this definition. It’s quite literally a sole tradership, wherein the business owner and the business are one and the same and not a separate legal entity like a corporation.
Nevertheless, don’t let its simplicity fool you because this business structure is most suited for entrepreneurs looking to start smaller enterprises that won’t house hundreds of employees or manage large-scale operations. And that’s because there’s a lot less paperwork involved, and any of the business’s profits are still recognized as personal income and taxed the same way.
Furthermore, the hallmark feature that sets sole proprietorships apart from other business structures is the freedom in decision-making and increased level of flexibility in managing the business. And you won’t have to worry about partners or shareholders because the only stakeholder of concern is yourself.
However, There Are Glaring Drawbacks
Now, even if it sounds perfect when looking at its advantages, a sole proprietorship is not without its glaring drawbacks. Considering the uncertainty and volatility of markets in 2022, the risks far outweigh the possible benefits. Specifically, when running a sole proprietorship, you must assume 100% of all associated business risk, account for the lack of business continuity, and work around the strict limitations of funding.
- Assume 100% of All Business Risk: Since you and the business are one and the same, any and all payment obligations and expenses incurred can be traced back to your balance sheets. Sure, while that may not be a problem when you’re profitable, this means your personal assets are at risk due to unlimited liability. And since we are in one of the worst crypto winters of history, who knows what other market disruptions could happen in the near future.
- Lack of Continuity for the Business: If your purpose for starting a business is more than just the potential profit and includes goals like leaving a legacy or handing it down to a dependent of yours, your death will actually lead to the automatic dissolution of the business as well. As a result, there’s an extreme lack of business continuity for those who pursue a sole proprietorship because it is not considered a separate entity.
- Strict Limitations on Funding: Building and sourcing capital are the two activities that create the foundation for a business and introduce growth opportunities, but since a sole proprietorship depends on personal investments, your funding is limited to what you can afford and the loans at your disposal. Unlike partnerships or corporations, you can’t raise capital through shareholders or co-owners because of the limitations in business structure when raising startup venture capital.
Evaluate Your Business Goals
Given the reasons mentioned above, it’s clear that entrepreneurs must evaluate their business goals before choosing to proceed with a sole proprietor business structure. And of the easiest way of assessing your business roadmap is by answering two specific questions regarding future plans of expansion and increased exposure to risk.
1. Do You Have Plans to Expand Your Business?
If the answer is yes, then registering as a sole proprietorship will only work against you in the long run. Thus, you might want to consider limited liability companies, general partnerships, or stock corporations for better tax treatment. Otherwise, there should be nothing to worry about if you keep your operations small-scale.
2. Does Increased Exposure to Risk Scare You?
If the answer is yes, a sole proprietorship will only do you disfavor because unlimited liability and the risk of bankruptcy will cause creditors to chase after your personal belongings should the worst-case scenario happen. Unless otherwise, increased exposure is much better with larger teams that can afford legal counsel, professional processing services, and multi-functional departments.
A Sole Proprietorship Can Work Under the Right Circumstances
There’s no denying that a sole proprietorship can still work in 2022, but any of its advantages largely depend on the circumstances of your business idea. And if any of the following legal requirements, associated risks, and future expansions don’t align with your goals, choosing a different business structure is recommended.