What Is a Sole Proprietorship? – Advantages & Disadvantages


Steve Goldstein
Steve Goldstein
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Steve Goldstein runs LLCBuddy, helping entrepreneurs set up their LLCs easily. He offers clear guides, articles, and FAQs to simplify the process. His team keeps everything accurate and current, focusing on state rules, registered agents, and compliance. Steve’s passion for helping businesses grow makes LLCBuddy a go-to resource for starting and managing an LLC.

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With so many different business options, it can be a real challenge to choose the best one. One of the most basic choices that you can get in the market is that of sole proprietorships. But what is a sole proprietorship? We will try to answer that here.

sole-proprietorship

What Is a Sole Proprietorship?

A sole proprietorship is an unincorporated business, which means it wouldn’t be under the supervision of government rules, unlike limited liability companies, corporations, and so on.

Even though the sole proprietorships put a lot of restrictions on the owner, it is the easiest way to establish oneself in the market, all thanks to the simplest business form it supports. Since government regulations are not imposed on this type of business, one won’t have to deal with any kind of complications at the time of starting the proprietorship business.

Here, only one person acts as the proprietor owner, and he is responsible for enjoying all the profits the business will earn in each financial section. However, he will also be responsible for handling the losses, legal lawsuits, and other setbacks. The taxes that the proprietor needs to pay will be a part of the total profits he has earned.

Characteristics of Small Businesses Ceclared as Sole Proprietorship

Generally, the sole proprietorships are formed by the small scale businesses who don’t want to abide by the legal complications and waste more time in fulfilling them rather than setting up their businesses.

However, for a small scale business to become a sole proprietorship company, there are certain criteria which it needs to fulfill.

  • The business should have a low risk of business and personal liability, losses, legal lawsuits, and bankruptcy.
  • The profit increase formulated for the SMBE should be small with an amount that can be gained easily within the stipulated time period.
  • The customers targeted by the small-scale business must be within a small radius, like the locals, families, friends, and others.
  • Usually, the small businesses have started with their hobbies as the business mode are suitable for gaining permits to be a sole proprietor.

Sole Proprietorship Example

Let’s say you want to start a dancing studio. But, for establishing a company, you will have to meet certain requirements, which are not possible for a single-standing business with not much capital investment. So, the best option you will have is to go for a proprietor business where you will be your owner, and the profits and losses will be on your shoulder. You will be liable to pay the business taxes from your profit. However, you wouldn’t have the legal separation exposure with this particular business ideal.

How Sole Proprietorship Business Works

What you must first understand is the responsibility of the proprietor in a business. This particular business is not a separate legal entity from the owner, and hence you will be responsible for signing the checks, drawing the lease agreements, filing taxes, and other documents with your name on them. In fact, if your business is receiving any kind of payment, the document will have your name on it.

Can Any Other Name Be Used for Legal Works in Sole Proprietorship?

Yes, it is possible for a proprietor to use a fictitious name for representing this particular form of business in legal terms. For this, you need to register yourself with another name under the rule of DBA or “to do business as.” Once your filing is accepted, you will be able to work with another identity rather than your own. However, even with the DBA, the personal tax return will be the same.

Employees and EIN

In such business structures, the sole owner can get an EIN number from the Internal Revenue Service department.

What Is an EIN?

The Employer Identification Number (EIN) is a nine-digit ID that will become the social security number of your proprietorship business entity.

What Is the Purpose of an EIN for a Sole Proprietor Business?

With the EIN number, you will be able to open a business bank account, hire employees, calculate tax on employees, and perform other business activities.

Taxes Levied on Sole Proprietorship Business

Even though sole proprietorship entrepreneurs act differently than incorporated businesses, taxation will be levied on your business. It’s a one-person business, and hence, you will be responsible for paying the personal income tax and the self-employment tax from the earnings you are making every year. for filing the income tax return documents every year, you can look for professional consultants like Legal Zoom.

Advantages and disadvantages of a sole proprietorship

While there are significant upsides to setting up a sole proprietorship, there are also downsides to consider. Here are the advantages and disadvantages of a sole proprietorship.

Advantages of a Sole Proprietorship

Easy to establish

One significant reason to start this formal business structure is its ease of use. For becoming the sole proprietor owner, you won’t have to go through several legal complications, unlike other companies, including the Limited Liability Company.

Exercise full control over the business

Even though the sole proprietorship taxation will be levied on your profits, you can still have full control over this unincorporated business entity. It is you who will sign the documents related to the business, and also, the documents, take the business decision and reports received will be under your name.

Can take quick and reliable decisions

You will have full ownership of the company, and hence you won’t have to discuss anything with others. This way, the decision-making process can be made faster and more reliable, with minimal conflicts of interest.

Efficient operations

A sole proprietorship is well-known for the simplicity and efficiency in the operations. There will be no one other than you who will be operating the business, and hence, the authority will rest in your hands. That’s the reason why the proprietors enjoy the smooth flow of commands and requests throughout the business.

Disadvantages of a Sole Proprietorship

No benefits on sole proprietorship taxes

No matter how much amount you have to pay as the income taxes or the self-employment taxes, the Federal Government wouldn’t give you any benefits of the taxation.

No protection to personal assets

With the sole proprietor business model, you wouldn’t be able to enjoy unlimited liability. You will be responsible for dealing with the business losses and other forms of risk associated with the unincorporated entity.

Need to pay off the debts on your own

If you have any loan associated with your business, you will be liable to pay off the business debts and other liabilities.

F.A.Qs

How do I pay myself as a sole proprietor?

The sole proprietorship income is earned from the business bank account from where you will be able to draw the money as part of your profits.

Is the sole proprietor the same as that of a single-member LLC?

A self-employed sole proprietor is not similar to that of the limited Liability Partnerships because an LLC, there is a legal separation between the partners and the business. However, in a sole proprietorship, business ownership is not separate from the individual.

How to Start a Sole Proprietorship

Sole Proprietorship is owned by an individual. You can start it without any formal action. You just need to obtain all the necessary licenses and permits for the product/service offered.

One of the first steps in starting a sole proprietorship is deciding on a business idea. This is a crucial decision that will shape the direction of your business and should be carefully considered. It’s important to choose a business idea that you are passionate about and that has the potential to be profitable. Consider your skills, interests, and experience, as these can all play a role in determining the success of your business. Additionally, consider the market demand for the products or services you plan to offer, as this will ultimately be a determining factor in the success of your business.

Once you have settled on a business idea, the next step is to choose a name for your sole proprietorship. Your business name should be unique and memorable, and should reflect the nature of your business. It’s a good idea to research existing businesses in your industry to ensure that your chosen name is not already in use. Once you have selected a name, you may need to register it with your local government or obtain any required permits or licenses to operate your business legally.

Next, you’ll need to set up a business bank account for your sole proprietorship. Keeping your personal and business finances separate is essential for tracking your business expenses and income, as well as for tax purposes. Most banks offer specialized checking accounts for small businesses, so be sure to shop around and compare offerings to find the best fit for your needs.

After setting up your business bank account, it’s important to develop a solid business plan for your sole proprietorship. A business plan is a roadmap for your business that outlines your goals, objectives, target market, marketing strategies, and financial projections. A well-developed business plan can help you secure funding, attract investors, and guide you in making strategic decisions for your business.

Finally, it’s important to consider the legal and tax implications of starting a sole proprietorship. As a sole proprietor, you are personally liable for the debts and obligations of your business, so it’s important to take steps to protect your personal assets. Additionally, you’ll need to register your business with the appropriate state and local authorities, obtain any required permits or licenses, and comply with any tax regulations that apply to your business.

Starting a sole proprietorship can be a challenging yet rewarding experience for aspiring entrepreneurs. By carefully considering your business idea, choosing a unique name, setting up a business bank account, developing a solid business plan, and addressing legal and tax considerations, you can set yourself up for success in your new venture. With dedication, hard work, and careful planning, your sole proprietorship has the potential to thrive and grow in the competitive business landscape.

In Conclusion

Sole proprietorship is a business structure for a single owner. The management structure is similar to a single-member LLC. For a sole proprietorship company, the owner has all the right to make decisions. If you are about to start a sole proprietorship company then refer to this article. Tell us more about your experience by commenting below.

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