A sole proprietorship is the simplest business entity. The owner and the business are one and the same. A sole proprietorship is an unincorporated business owned by one individual. The individual, known as the sole proprietor, usually handles the day-to-day responsibilities of running the business. With sole proprietorships, the owner owns all assets and profits generated by the business. However, the owner also maintains complete responsibility for liabilities and debts the business may incur. Once an individual has obtained the necessary licenses, tax identification numbers, and certifications in his or her name, the business will be formed.Advantages of a Sole Proprietorship
- Sole proprietorships are easy to organize and they are the least expensive of all business formations.
- The sole proprietors have complete control to make decisions that they see fit.
- All income belongs to the owner to keep or reinvest.
- The money earned flows through the owner’s personal tax return.
- The business is easy to dissolve, if needed.
Disadvantages of a Sole Proprietorship
- The owner is liable for all debts of the business.
- The owner’s business assets as well as personal assets are at risk.
- The owner may be limited to using personal funds or consumer loans, while finding it difficult to raise funds.
- Problems may arise when trying to hire employees who are highly qualified.
- The employee benefits are not directly deductible from the business income.
- There are different percentages for taxable income varying based on the type of business formation.
- The owner can only transfer the business by selling all of the assets. It is difficult to have someone buy in to a business and the potential taxes from converting the sole proprietorship may present a hassle in the owner’s effort to sale or transfer part or the entire business.
There are no special forms or fees to start a sole proprietorship. When completing the general registration requirements that apply to all new businesses, simply state that the business is a sole proprietorship. However, there are some cities and counties that may require businesses to register with them and pay a minimum tax, in return for a business license or registration certificate.
If the business is going to be under a name different from the sole proprietor, the name must be registered.
Sole proprietorships may in some cases best serve the needs of individual business owners who manage the entire business themselves without the help of employees.
