A sole proprietorship is the simplest form of business organization. Only one person owns and is in charge of the business, and one person reaps all the profits or assumes all of the losses. There are many benefits and drawbacks to this form of business structure, and it is wise to weigh these aspects when opening a new restaurant.
The following list is the main benefits of being the sole proprietor of a restaurant:
- You are your own boss. You are in charge of every aspect of the restaurant, including operations and marketing, so there is nobody to answer to but yourself.
- All the profits are yours to keep. Since you do not have partners, a franchisor or board of directors, any profits your restaurant makes are yours to keep.
- Cheap and easy to form. You are considered a business if you plan to sell goods or services for profit. However, you will still need a business license, and if you will have employees, you will need to obtain an Employer Identification Number (EIN), too.
- Flexibility. Since you are the only person in charge of your restaurant, you can quickly change your menu or marketing strategy to suit your customer base.
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With every business format, there are some drawbacks. The following are the main downsides to being organized as a sole proprietor:
- Hard to secure startup funds. Unless you are individually wealthy or have rich relatives, getting enough funding to start your restaurant may be difficult. Because of a high failure rate, many banks see a sole proprietorship as a risky business venture. Plus, the lenders will look at your personal credit rating, so if you have a low credit score, it will be even harder to get a loan.
- You will practically live at the restaurant. Being a one-person operation often means that you will be working nights and weekends to get your business up and running, at least until your managers and staff are reliable enough to handle things on their own.
- Personal liability. As far as the law is concerned, there is no separation between the owner and restaurant for sole proprietorships. This means that you are personally liable for all of the taxes, debts and lawsuits of the business. If someone sues your restaurant, the courts can come after your personal assets (house, car, etc.) to cover the settlement costs.
- Self-employment taxes. Being your own boss means that there is nobody to take taxes out of your weekly paycheck. However, at the end of the year, you are still responsible for paying social security and Medicare taxes. You will have to remember to set enough money aside during the year to cover your anticipated self-employment tax amount.
Though sole proprietorships are relatively easy to form, there are still taxes and paperwork involved. The IRS has an entire site dedicated to sole proprietorships. Visit the IRS site to download the necessary tax forms.
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