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.
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