Does Starting a Sole Proprietor Coffee Shop Make Sense?

Sole Proprietor Coffee Shop

Choosing the Right Coffee Shop Business Structure.

Is a Sole Proprietor Coffee Shop The Best Option?

Opening a coffee shop can be an exciting business to start. With demand for gourmet coffee growing over the last decade, starting a coffee shop seems like a promising prospect. Moreover, a healthy craving for espresso-based drinks has led to the rise of coffee shops all over the country.

As an aspiring coffee entrepreneur, you have various choices and steps you’ll need to take. For example, you’ll need to decide on your coffee shop concept, the name of your coffee shop, select your coffee shop menu, and pick the right coffee shop location.

Naturally, these are all exciting decisions that can get the attention of your customers and competitors alike. Each of these business elements and other factors in making your coffee shop business successful.

Yet, some critical decisions may not get the attention and thought it deserves.

Specifically, that is your coffee shop business structure. Let's take a deeper look at this topic below:

Choosing Your Coffee Shop Business Structure

Your business structure is the legal formation of your coffee business through a governmental agency.

Your choice of a coffee shop business structure can impact everything from your liability, your personal tax obligations, and hiring baristas to your coffee shop management.

As you can imagine, establishing your business structures is one of the most important requirements for setting up a coffee shop business.

Today, in the United States, you have several major options to choose from. For example, you can create a corporation, a non-profit, a partnership, a limited liability company – or form your business as a sole proprietorship.

Many people choose to start a coffee shop as a sole proprietorship; however, there may be better options for independent coffee shop businesses.

In today’s article, let’s discuss what a sole proprietorship is and why you may or may not want to open a sole proprietor coffee shop.

Note:

As always, this article is for educational purposes only. You should do your due diligence and make the right decision that works for your coffee shop business. Consulting with a CPA or your tax adviser may be an excellent place to start.

Further Reading: How to Start a Coffee Shop Successfully

A Sole Proprietor Coffee Shop?

What is a sole proprietor?

A sole proprietor is an unincorporated business that generally has one owner. There is no legal distinction between the owner of the business and the business entity itself in this type of business structure.

Many sole proprietors do business under their names. Additionally, since you own the business, you will be responsible for all debts and legal liabilities that come from the operation and management of the company. Like other business types, a sole proprietor still needs a business license to operate as a business.

A coffee shop sole proprietor definition:

A coffee shop sole proprietor is a business person who operates a coffee shop or business solely under their name – though it may be branded differently. Still, there is no distinction between the person and the coffee shop business. Legally, they are the same. A coffee shop sole proprietor is subject to all the profits, assets, debts, and liabilities assumed by the business.

Sole Proprietor Coffee Shop

Should I start a Sole Proprietor Coffee Shop?

Are there benefits to being a sole proprietor?

The benefits of a sole proprietor depend on the type of business. For many different business types, being a sole proprietor makes perfect sense. It’s good for businesses with low risks and relatively low profits, like accounting, tutoring, freelancing, cleaning, repair services, etc.

Does it make sense to be a coffee shop sole proprietor? I am doubtful that it is beneficial, especially when you consider the other options available.

If you disagree, please email me and tell me why it is better to be a coffee shop sole proprietor, and I may add the reasoning to this article in an update.

Nevertheless, the standard benefits of a sole proprietor are:

• Ease of setup
• Lower costs in fees
• Complete control
• Simplified business ownership

There may be some filing fees like other business structures, but the costs are often lower, and it’s pretty easy to set up a sole proprietor business by filing in your state.

Reconsidering a Sole Proprietorship Coffee Shop

Though easy to set up, the benefits of other business structure types often make a sole proprietor coffee shop decision less appealing.

While a sole proprietorship may be a good business structure for gig workers, specific freelancers, consultants, or ride-share drivers, other business structures seem to have more benefits when opening a coffee shop.

Ultimately, you want to create a business structure that works for you – meaning that you should choose a type of structure that will help you maintain good business health and the efficient operation of your coffee shop.

Risks of a Sole Proprietor

One of the benefits of setting up a limited liability company (LLC) is separating you and your coffee shop business. In contrast, as a sole proprietor, you essentially are the coffee business. And therefore, you are not insulated from any liability that may occur.

As a sole proprietor, there is no real separation between you and your coffee shop business. You assume all responsibilities – legal and financial.

If your business gets in debt due to bad loans, poor management, or an employee acting negligent, you are responsible for any damages, losses, or lawsuits.

Risks include:

• Greater personal liability
• Potential loss of personal savings & assets
• Maybe liable for judgments
• Responsible for the cost of accidents or negligence

A different business structure – such as a coffee shop corporation or a coffee shop LLC, would limit your personal responsibility – legally and financially. In other words, your assets would not be threatened by actions done under the operation of the business.

Co-mingling Money Is a Bad Idea

When you operate a coffee shop sole proprietorship, your business money can get intermingled with your personal cash.

This is not a good thing.

While I am not an accountant, I know that co-mingling funds should be on your “Do Not Do” list from an accounting or an IRS perspective.

Paying for your groceries and dinner dates, mixed with paying your baristas’ salaries and wholesale coffee accounts, would be something to avoid entirely.

Co-mingling money often:

• Muddies personal and business money
• It makes paying taxes harder
• Creates managerial ineffectiveness
• Unable to make clear financial decisions
• Encourages sloppy and inept management

Having a clear distinction between “your coffee shop business” and personal money would make your accountant’s job easier, tax payments a lot more accurate, and financial decisions more effective.

Unable to Maximize Your Business Equity

When you build a coffee brand, you generate more than just profits. You create more excellent value that isn’t just measured by how many coffees and muffins you sell. Rather, you generate brand value, goodwill, and credibility.

You create business equity.

As a sole proprietorship, your business is essentially yours. While this might be good for some celebrities and high-profile people with high name recognition, you probably don’t want your coffee brand to be based on who you are.

Instead, you probably want to create a simple but effective brand centered on a specific business name, coffee brand logo, theme, color scheme, and clear messaging that focuses on your Unique Sales Proposition or USP.

Building brand equity means building up the value of your coffee shop business. Your brand and business equity allows you to create solid relationships with your customers, distinguish your business in a competitive market, and help you improve sales and profits.

Business Credit & Financing Is More Difficult

Your coffee business can develop its credit history as a separate business structure (an LLC). That is, it can build a strong history of paying back bills and debts.

If you decided to grow or invest in new equipment, you could take out a business loan and borrow against your business credit and revenue.

This could have enormous positive consequences in the future if you decide to grow or acquire new business additions, etc.  

Potentially Inaccurate Tax Payments

When you have a clear distinction between your personal money and your business operation, it is easier to establish accurate reporting of your financial records.

Developing your profit and loss statements, income statements, inventory statements, and tax obligations will allow you to avoid inaccurate tax reporting, audits, fees, and penalties.

With this in mind, it seems that other business structures other than a sole proprietorship may provide a more prudent way of setting up and operating a coffee shop.

Poor Financial Management 

Financial mismanagement can lead to coffee shop failure. On the other hand, having accurate data reporting distinct sales and cost numbers, allows you to make better financial management decisions.

Guesstimating your revenue, sales, and overhead costs can only leave your coffee shop management ineffective and murky.

In contrast, when you have distinct and accurate reporting, you can determine a clear direction and set appropriate goals. Additionally, you will accurately measure your benchmarks and progress, allowing you to make better adjustments if necessary.

Looking at Other Business Structure Options

As a coffee shop business owner, you have a variety of business structure options. Each of them has its advantages and disadvantages. For example, aside from a sole proprietorship, you can set up a coffee shop as a non-profit, a corporation, a partnership, or a limited liability company (LLC).

Should I Start an LLC Instead?

A limited liability company is another possibility for a business structure. Many coffee entrepreneurs choose to start a coffee shop LLC because it’s easy to set up and has essential benefits for business owners.

Whether you should start a coffee shop LLC depends on the advantages it provides you and your business.

As the owner of an LLC, you get similar tax benefits as a sole proprietor but with the added insulation of liability. So, for example, if you or one of your employees accidentally spills hot coffee on a customer, causing injury and pain, your personal assets – such as your home, car, and personal savings – are often insulated from any legal judgments.

For more information on coffee shop LLC benefits, read our post, Benefits of Starting a Coffee Shop LLC.

Conclusion:

As a business owner, you will have a variety of business structure types to choose from. When we are talking about a coffee shop business, some business types are better than others. My recommendation is to sit down, research, and determine what makes sense for you and your business.

Sole Proprietor Coffee Shop

Why a Sole Proprietor Coffee Shop is a Bad Idea

Additional Questions:

What are the requirements for opening a coffee shop?

As you begin to research your coffee shop business, you’ll find the state requirements to open your coffee shop. They include everything from establishing your business structure to applying for the necessary permits and licensing. As a business owner, you have special requirements as well – they provide a legal framework for hiring and firing employees, salary payments, and gratuity policies. Of course, depending on your menu or whether you serve alcohol at your coffee shop, the requirements will change.

For more information on the requirements to open a coffee shop, please read our post, Requirements to Open a Coffee Shop.

What are the steps to opening a coffee shop?

The steps to open a coffee shop depend on what type of coffee business you would like to open – and where you currently are in the process. Traditionally, there are some steps you will want to take in a specific order. These include writing a coffee shop business plan, developing a budget, and creating a menu.

For more information on the steps to opening a coffee shop, please read our post, How to Open a Coffee Shop Successfully.

How much do coffee shop owners make?

Owning and operating a coffee shop can be profitable. But how much can you make? 

The revenue your coffee shop produces depends on various factors, including your sales volume, your average receipt price, and your overhead costs. This can vary depending on your location, competition, menu offerings, and target market.

For more information, please read our post, How Much Does a Coffee Shop Owner Make?

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Based in Seattle, Washington, USA, Coffee Shop Startups is dedicated to providing you with the most relevant information on how to start a coffee shop business successfully. Over the last 11 years, we've helped thousands of aspiring coffee business owners worldwide. We harness the experience, wisdom, and knowledge of many successful coffee shop owners to help you increase your chances of success and profits. We support business owners who want to start a coffee business by providing them with valuable information on starting their coffee business successfully.