The Pros and Cons of a Sole Proprietorship in Texas

Factors to Consider When Setting Up a New Enterprise

You’ve decided that you want to be your own boss. One of your first considerations will be the legal form of your business. Maybe you’re going to run the whole show or maybe you’ll be responsible for the bulk of the business. As a consequence, you may be contemplating simply establishing a sole proprietorship. Let’s look at the compelling reasons for and against that business form.

What Are the Benefits of a Sole Proprietorship?

The most attractive feature of a sole proprietorship is commonly the ease of setup and the absence of any significant monetary outlay. In fact, las a general rule, you can typically go into business as a sole proprietorship by simply doing so. You’d be wise to secure a business license, if required in your state or municipality, and you may want to file an “assumed name certificate” with the county where your business will be located, so that you can protect your business if others try to capitalize on your name.

As a sole proprietorship, you won’t have to pay corporate taxes, but you will have to report all earnings on your personal income tax return. There are no annual reports that must be filed with the state of Texas and you’ll have absolute freedom to make structural changes to the business without regard to Texas state laws.

Why Can a Sole Proprietorship Be Problematic?

There are many downsides to a sole proprietorship:

• Unlike a corporation or a limited liability company, a sole proprietorship provides no protection from liability for the debts of the business. If you are named as a defendant in a lawsuit against the business, your personal assets may be available to satisfy a judgment.
• You will be required to pay self-employment tax on all earnings—This tax, a 15.3% assessment, is intended to cover your contributions to both Social Security and Medicare taxes
• It’s much more difficult to raise capital with a sole proprietorship—You can’t sell shares of stock to raise operating funds. Any debt you incur will be personal debt. If a third party makes an equity investment (becomes an owner through a contribution to the company), it’s no longer a sole proprietorship…it’s now a general partnership.
• There’s a stigma attached to sole proprietorships—Most sole proprietors are viewed as “part-timers,” people running a side hustle out of their basement. Setting up an LLC or a corporation tends to give you more credibility.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to business formation. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.