With more than 17 million operating in the United States, nearly 70 percent of businesses operate as sole proprietorships. In addition to the relative simplicity compared to large corporations, opening a sole proprietorship is a low-cost method of entering into the business world. From consultants and free lancers to independent contractors, nearly anyone can create a sole proprietorship.
As the name suggests, “sole proprietorship” refers to a business that is owned by a single owner and should not be confused with a corporation. There are no corporate taxes involved and the sole proprietor pays income tax on the profits generated. The person who organized the business pays personal income taxes on the profits made. This makes the accounting procedure relatively simple for the sole proprietor, who also enjoys complete autonomy in terms of making business decisions.
Setting up a sole proprietorship is easy. One of the main steps is to obtain a local business license (a sales tax permit may also be required). For certain businesses, such as restaurants or legal practices, you may need additional local or state licenses. Legal regulations and licenses aside, there are other major factors to consider when setting up a sole proprietorship. You will have to create a business plan, develop marketing and advertising campaigns, set up a budget, and find ways to fund your business.
Advantages and Disadvantages of a sole proprietorship
Many business owners choose to operate as a sole proprietorship to alleviate the difficult tax procedures that go along with other forms of operation. As a sole proprietor, you would simply have to file an individual income tax return (IRS Form 1040) including your business losses and profits. There are no restrictions on the number of people you can hire, and from the tax and legal perspective there is no distinction between you and your business. You can therefore hire as many people as you want and also recruit independent contractors if need be. Being in complete control of their business, sole proprietors make all the business decisions keeping law in mind.
Sole proprietorship is not for every business owners especially business owners that are not willing to assume all risks. Unlike a corporation or LLC, your business doesn’t exist as a separate legal entity. All your personal wealth and assets are linked to the business. Another downside is the inability to raise capital easily. Proprietors cannot sell shares the way other corporations do, so they have to seek out alternative methods to raise the necessary capital to expand their business.
Choosing the best business structure will ultimately impact the success of your business. Setting up a sole proprietorship is the easy and quick way to setup a business, but may not be the best structure for your operation. Make sure you weigh all the pros and cons before deciding if this structure will work for you.