8 Disadvantages and Advantages of Proprietorship

8 Disadvantages and Advantages of Proprietorship

Being a proprietor is often considered the dream life. You get to call the shots, earn your own success, and get away from the daily grind of traditional employment. Those advantages do exist, but there are certain disadvantages which must be considered as well, like the extra hours that need to be worked because you’re either working on your own or perhaps with the help of a spouse. If you’re thinking about starting up a proprietorship, then here are the key points to consider when you start to look at the advantages and disadvantages of this decision.

Advantages of Starting a Proprietorship

1. You can often work out of a home office.
The only exception to this rule may be if your proprietorship involves something that is against your local zoning ordinances. You might not be allowed to open a hair salon, for example, because your local residential zoning doesn’t allow for customer traffic on your property. For most, however, this is a big advantage over other possible employment opportunities.

2. The finances are very easy to control.
Under most proprietorship structures, the business finances are directly related to the personal finances. This makes it easy to transition into this business format because you don’t have to set up business banking accounts, create a business name, and sometimes you might not even need a business license. You’ve got you and what you do best – and you can get to work immediately.

3. You don’t have to file multiple tax returns.
Your business income from a proprietorship in the United States is treated as personal income. You will have to file the 1040 long form, which is a little more expensive through tax return software or a tax preparer, but you won’t have to file multiple returns as you would with other business structures. As long as you keep track of your income fairly well throughout the year, the tax paperwork is pretty painless.

4. You set your own hours.
You’re going to be working longer hours, especially in the first days of starting a proprietorship, but even that comes with an advantage. You set the times that you work. Need to get the kids to the doctor at 9:30am? Do it and rearrange your work schedule. Want to work after the kids go to bed to spend more time with them? Do it. Want to take a vacation tomorrow? You can do it – if you have the money, that is. You stay in control.

Disadvantages of Starting a Proprietorship

1. Your personal assets are always at risk.
The first thing you should do when starting a proprietorship is to get some level of insurance protection. Because your business and personal assets mingle together, everything you own is put at risk if some sort of litigation were to start against you. This means you could lose your house, your car, your stocks – literally everything. Many proprietors don’t realize in their first days of working on their own.

2. There are always unpaid working hours.
If you’re used to working paycheck to paycheck, then a proprietorship can be a tough transition because paychecks, especially at first, can be few and far between. When you do get paid, it might be less than you’re accustomed to making. This kind of business structure is more of a long-term investment that offers you short-term benefits, like schedule flexibility, than an instant money-maker for most people. Think of this as a 5 year project.

3. You have a lot of tax forms that will need to be sent out.
In the US, you must send out a 1099-MISC to any independent contractor to whom you pay more than $600 in a tax year. Determining if someone is classified as an employee or an independent contractor depends on the state. This also works in reverse. If you are receiving more than $600 from any one client through your proprietorship, you will need to receive these forms or report that you didn’t get them and should have when you file your taxes.

4. You may be required to create a business structure anyway.
States like Alaska and Washington are very strict about what they define as a business. Many proprietors don’t realize they are required to have a business license, carry insurance, and other traditional business tasks in these states because it isn’t required elsewhere. The same is true from a global perspective. Always check with your local laws before completing your first transaction to make sure you’re not stuck with future costly unintended consequences.

These proprietorship advantages and disadvantages cover some of the key points which are commonly missed under this business structure. Take your time in deciding, but also take advantage of an opportunity should it come your way so that you can always have the job of your dreams.