The U.S. Small Business Administration “SBA” states “A sole proprietorship is the simplest and most common structure chosen to start a business.” It is a business that is owned and operated by one individual. There is no distinction between the business and the individual, the individual is the business and vice a versa. It is a business that is not incorporated. The individual owner is entitled to all the profits and is responsible for all of the business’s debts, losses and liabilities.
Forming a Sole Proprietorship
No formal actions have to be taken to form a sole proprietorship. Performing business activities on your own, with no partner, automatically categorizes you as a sole proprietorship. So if you offer business services to the public, you may already own a sole proprietorship without knowing it. For example, if you are a web designer that offers your services to the public in your individual capacity, then you are a sole proprietorship.
Sole proprietorships need to obtain all the necessary licenses and permits to run their business, yet they do not need to incorporate their business. The regulations relating to your business may vary by industry, state and locality. You can use the Licensing & Permits tool provided by the SBA to find a listing of federal, state and local permits, licenses and registrations you’ll need to run your business.
If you are running your business under a name that is different than your own, then you will have to file a fictitious name registration (also known as an assumed name, trade name, or DBA name, short for “doing business as”). The fictitious name must not be claimed or used by another business or you will more than likely be sued by the other party for trademark infringement.
Sole Proprietor Taxes
Because you and your business are one and the same in a sole proprietorship, the business itself is not taxed separately, the business’ income is your income. Therefore Ii is your individual responsibility to withhold and pay all of your income taxes relating to your business, including your self-employment taxes.
Advantages of a Sole Proprietorship
The advantages of a sole proprietorship are as follows:
- It is easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
- It grants its owner complete control of the business. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
- It has tax advantages. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.
Disadvantages of a Proprietorship
The disadvantages of a sole proprietorship are as follows
- The individual owner has unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
- It complicates the owner’s ability to raise money. Sole proprietors often face complications and difficulties when trying to raise money. Because a sole proprietorship does not have any ownership interests to sell to the public “stock interests in the business,” investors often will not invest in a business that they will not own. The SBA states that “Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.”
- A sole proprietorship places a heavy burden on the owner of the business. Having complete control of your business will cause you to carry the psychological burden and pressure of knowing that your business will succeed or fail based on the actions and decisions you make for your business.