Sole Proprietorship Advantages: 5 Reasons This May Be the Best Structure for Your Business

If you’re thinking of starting a business, a sole proprietorship is the cheapest and easiest business structure to use.

Small business owner reviewing finances
Updated May 23, 2024
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In the United States, the entrepreneurial spirit is going strong. According to the Small Business Administration, 500,000 new small businesses were launched in 2019.

If you’re thinking of opening a business or starting a new side hustle, one of the biggest decisions you have to make is how to structure your business. The most common are sole proprietorships, partnerships, limited liability corporations (LLCs), and corporations.

If you’re not sure where to start and are trying to keep costs low, sole proprietorship advantages are numerous. After all, starting a business is all about how to make money. Here’s what you need to know about running a sole proprietorship.

In this article

What is a sole proprietorship?

A sole proprietorship is the default business structure. The IRS automatically considers you to be a sole proprietor if you conduct business transactions and don’t select another structure. This structure can be a smart choice if you want to keep things simple, or if you’re testing out a new idea and want to see how it performs before spending money on more expensive business structures and filing fees.

However, keep in mind that those are only the IRS’ requirements; there may be other things you need to do to run your business properly. For instance, you may need to apply for a business license for your state, county, or city, or you may need a permit to operate out of your own home. To find out what your local requirements are, contact the Small Business Administration in your area.

5 sole proprietorship advantages

If you’re thinking of managing your business as a sole proprietorship, there are five key benefits to running your business this way.

1. Easy startup process

As a sole proprietorship, you and your business are the same entity from a legal perspective. You have total control of your business, and there is nearly no paperwork to complete. That’s a big advantage over other business structures, like LLCs, that require you to file articles of organization.

You’ll only need to file paperwork if you plan on conducting business under another name. For example, if you’re advertising yourself as “Innovation Marketing” rather than using your first and last name, you’ll need to file “Doing Business As” paperwork with the state.

2. Low costs

If you want to open an LLC or S-Corp, you need to be prepared to pay fees. Depending on where you live, fees can be substantial. For example, it costs $500 in Massachusetts to register an LLC, and it costs $500 per year to submit your required annual report. By contrast, there’s no cost to operating a sole proprietorship.

3. No separate business taxes

With a sole proprietorship, you don’t need to worry about filing a separate business tax return. Sole proprietorships are pass-through entities, meaning your business profits pass through to your personal income. Your tax bracket is based on your personal and business income combined.

4. Qualify for business checking

Even though sole proprietorships don’t require any paperwork or fees, you still can operate like a real business. And part of this may involve simplifying your finances by separating the business from the personal. As a sole proprietor, you can open a business checking account. Some banks will require you to register for an IRS Employer Identification Number (EIN), but other banks will allow you to create an account with just your Social Security number.

Opening a business checking account is a smart idea, regardless of your business’ structure. It will simplify things for you at tax time, and protect you if the IRS selects you for an audit.

5. Gain eligibility for business credit cards

As a sole proprietor, you are also eligible for business credit cards. Typically, you can apply for one and get approved with just your Social Security number on the card application. Not only will it help you manage your expenses, but using a business card can help you earn valuable rewards.

Looking for the best business credit card? Consider these three options.

1. Ink Business Cash® Credit Card

If you’re just starting out and want a basic rewards card with a $0 annual fee, check out the Ink Business Cash® Credit Card card. You’ll earn:

  • 5% cash back at the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year
  • 2% cash back at the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year
  • 1% cash back on all other purchases

Plus, you’ll earn $350 when you spend $3,000 on purchases in the first three months and an additional $400 when you spend $6,000 on purchases in the first six months after account opening. And, you’ll get a 0% introductory APR on purchases for 12 months (then 18.49% - 24.49% Variable), giving you time to finance major expenses. 

2. Capital One Spark Cash Plus

If you’d rather earn a flat cashback rate rather than have different spending categories, consider the Capital One Spark Cash Plus. The annual fee is $150. You’ll earn 2% cash back on every purchase, every day; plus 5% cash back on hotels and rental cars booked through Capital One Travel.

As an added perk, you’ll earn $1,200 after spending $30,000 in the first 3 months.

3. American Express® Business Gold Card

If you want a premium rewards card, the American Express® Business Gold Card card may be for you. Although it has a $375 annual fee , its rewards and benefits can offset its cost. You’ll earn 4X Membership Rewards Points on purchases in the two categories with the most spend each billing cycle from 6 eligible categories (up to $150,000 in combined purchases each calendar year, after that 1X), 3X Membership Rewards points on flights and prepaid hotels booked at amextravel.com, and 1 point per $1 spent on other eligible purchases.

Earn 70,000 Membership Rewards points after spending $10,000 on eligible purchases in the first 3 months as a new cardmember. The card has extra benefits like baggage insurance, car rental loss and damage waiver, and expenses management tools, though enrollment is required for select benefits.

Card name Reward details Annual fee
Ink Business Cash® Credit Card 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year; 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year; and 1% cash back on all other purchases $0
Capital One Spark Cash Plus 2% cash back on every purchase, every day; plus 5% cash back on hotels and rental cars booked through Capital One Travel $150
American Express® Business Gold Card 4X Membership Rewards Points on purchases in the two categories with the most spend each billing cycle from 6 eligible categories (up to $150,000 in combined purchases each calendar year, after that 1X), 3X Membership Rewards points on flights and prepaid hotels booked at amextravel.com, and 1 point per $1 spent on other eligible purchases $375 (terms apply)    

When a sole proprietorship might not be the right choice

While sole proprietorships are simple and cheap to operate, there are some drawbacks to keep in mind:

  • Personal liability for debt: With a sole proprietorship, you are personally responsible for any debt you take on for the business. If you take out a business loan or use a credit card and fall behind on your payments, creditors can come after your personal assets to recoup their money — and wreck your credit in the process.
  • Ownership limitations: As a sole proprietorship, you are the only owner. If you want to add a partner to share their expertise and take on responsibility, you’d have to dissolve the company and start a new business structure.
  • Business ends if you leave: A sole proprietorship can’t be transferred to a new owner. If you decide to end the business or if you pass away, the business dissolves with you.

The bottom line on sole proprietorships

If you’re thinking of how to start a business, consider sole proprietorship advantages and drawbacks before making a decision on how to structure your business. While sole proprietorships are cheap and easy, they’re not for everyone. If you want to include partners, need to borrow money, or want to limit your liability, you may be better off with another business structure.

Up to 5% Cash Back

4.8

Ink Business Cash® Credit Card

Current Offer

Earn $350 when you spend $3,000 on purchases in the first three months and an additional $400 when you spend $6,000 on purchases in the first six months after account opening

Annual Fee

$0

Rewards Rate

5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year; 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year; and 1% cash back on all other purchases

Benefits and Drawbacks
Card Details

Author Details

Kat Tretina

Kat Tretina is a personal finance expert focusing on practical financial matters, including student loans, debt repayment, side hustles, insurance, and healthcare. Drawing from her personal experience, she aims to simplify complex financial topics and provide individuals with the information they need to make informed decisions.