When deciding on forming a business, you are confronted by many options. So, what exactly is a sole proprietorship and what does that mean for you, as the owner? Here we will explain the primary characteristics of the sole proprietorship.
According to the U.S. Small Business Administration, the sole proprietorship is the most popular business form that small businesses take. This is because it is the simplest and most inexpensive method of forming a new business. There is no official application that needs to take place and you do not need to register with a government agency. In actuality, many people who provide supply goods and services to others may be sole proprietors without even knowing it!
There are numerous differences between a sole proprietorship and other business entities, but what follows are the three most important ones.
- No legal separation between the owner and the business:
The business can function under the owner’s personal name, but also under a false name, which needs to be registered. The owner has access to all of the businesses’ profits but is also fully liable for all of the businesses’ debts. It is the owner who has the responsibility to sign checks, contracts, and lease agreements in their personal capacity under their legal name. Payments made to the company are most often addressed to the owner’s legal name. As there is no legal separation between the owner and the business entity, taxes are also relatively easy to file. The business income is encompassed by the owner’s personal tax return. It’s also beneficial that the tax rates are at the lowermost of the business structure. However, it is important to remember that as the owner of a sole proprietorship, you are practically self-employed. Because of this you will be liable to pay both income tax, as well as self-employment tax each year.
However, this lack of legal separation between you and the business has the consequence that you are personally liable for the debts and duties of the business. Should the business fail or be embroiled in legal disputes, your personal assets are fair game and may be repossessed by creditors.
Sole proprietors do also often struggle to raise money for the business. As you are the sole owner, you are unable to sell stock in the business, and this restricts possibilities for investors. Unfortunately, banks are also reluctant to provide loans to sole proprietors because of the assumed excess risk involved as pertains to repayment should the business cease to function.
- Ease of formation:
One of the major benefits of a sole proprietorship is the relative ease of formation. Technically speaking, the moment that you supply goods or services to clients, you are seen as a sole proprietorship. There isn’t an official application process and there isn’t a mandatory registration. It is also the least expensive to form with minimal costs involved. Legal costs are restricted to the acquisition of required licenses and permits which may be dependent on the state where the business operates and the nature of the business. You may run your business under your own name or choose a fictitious name. This is also known as an assumed name, a trade name, or DBA (“doing business as”) name. Remember, the name must be unique! Another business cannot already operate under the same name as yours.
- Control by Owner:
As the sole owner of the business, you are answerable to no one but yourself. You are in control of any and all decisions relating to your business. There is no need to confer with stakeholders or anyone when you have the need, or the desire, to make a change to the business. This power may have a downside as it has increases the pressure on the business owner. Without anyone to consult with, the burden is on you to make the correct decisions. The responsibility for both the triumphs and failures of the business falls on your shoulders.
For all you need to know about sole proprietorships, head to TRUiC who provides easy to understand details about sole proprietorships and how to start one.