Forming a sole proprietorship: Benefits and drawbacks

On Behalf of | Aug 24, 2018 | Uncategorized |

Forming a business constitutes an exciting process. You believe in your idea, and you want to create an entity to sell your product or service. You do not have business partners, but you want to ensure that your business idea is legal and protected under Michigan and Ohio law.

A sole proprietorship gives you the ability to own and operate your business individually. No partnerships, corporations are involved, and you can control all business elements. Both advantages and disadvantages exist when forming a sole proprietorship, so it is important to weigh the responsibility and individual control of this type of entity.

Advantages and disadvantages of sole proprietorships

Both in Michigan and Ohio, forming a sole proprietorship involves benefits and drawbacks. Though the most popular business entity to create, sole business owners must take into consideration the burden of costs and obligations.

Advantages include:

  1. Easy formation: Creating a sole proprietorship includes two simple, quick steps. When beginning your business, you must receive a permit to begin selling your product or service in Michigan or Ohio. Then you must register your business with your specific state and county.
  2. Low start-up costs: Because this type of business entity does not need large up-front costs, you may begin your business with very little capital.
  3. Direct control: As the sole owner, discussing business decisions with partners or co-owners is non-existent. You can bypass the time it takes to present ideas and get signatures to make even miniscule decisions by employing yourself as sole owner.

Disadvantages include:

  1. Owner liability: Perhaps the most significant drawback sole proprietorship creation includes is that all debts accrued by your business belong to you. Dividing debts and costs of start-ups and loans fall on your individual responsibility. If your business does not perform, partners do not exist to help you pay off owed money.
  2. Lower continuity: Should your business encounter a disaster, such as your diagnosis of a medical condition or a weather-related issue with production, your solely-owned business may lack the ability to continue running without other employees or owners.
  3. Raising capital difficult: With only one owner, collecting capital from investors may prove difficult. Showing value without the ability to show a following of “believers” in your business may not give you the opportunity to obtain funds.

When forming any business entity, it is imperative that you hire an experienced attorney to ensure that all required documents and information is correctly filed in your county and state. If you believe that creating a sole proprietorship proves best for your business circumstances, be sure to understand all advantages and disadvantages of the entity before filing.

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