The Internal Revenue Service (IRS) estimates that sole proprietorships make up between 71 and 75 percent of all firms in the US. The vast majority of sole proprietorships are small businesses. They account for only approximately 6% of total sales in the United States.
What is a sole proprietorship?
A business that is owned and run by just one person is known as a single proprietorship. That person is in charge of all the company’s debts and receives all the earnings. In the US, this is by far the most typical business model. Numerous industries are conducive to the success of sole proprietorships.
A sole proprietorship can be formed without taking any official steps. If you are the only proprietor, your business activities immediately when you start working for yourself. Without even realizing it, you may already have one. If you are a freelancer, independent contractor, or an artist who is earning money as a result of your work in the United States, you may have a sole proprietorship.
What are the advantages and disadvantages of a sole proprietorship?
There are advantages and disadvantages within a sole proprietorship structure that still need to be considered.
Advantages
- Ease of Start-Up
One of the key advantages of a sole proprietorship is its ease of start-up. Almost anyone can start one with a minimal amount of paperwork and legal fees.A sole owner must complete a minimum number of government regulations to start a new firm, which is different from city to city and state to state. A business license, which is authorization from the local government, is usually required for sole owners. Some businesses, including doctors, barbers, and day-care centers, may additionally require a special state license to operate. Other usual needs include registering a name and acquiring a certificate of occupancy to utilize a building. - Fewer Regulations
The proprietorship is the least regulated business structure. Even the tiniest company is subject to regulation, particularly industry-specific restrictions. A food establishment, for example, is bound by health regulations.Local zoning restrictions may also apply to sole proprietorships. Cities and towns frequently create different zones for residential and commercial purposes. Zoning laws may make it illegal for sole proprietors to do business from a residential dwelling.Aside from that, these small firms have few legal obligations. Due to the little amount of paperwork needed to establish a sole proprietorship, this type of ownership is typically the least expensive.
- Sole Profit Recipient
The sole proprietorship has the advantage of allowing the owner to keep all profits after paying income taxes. Many people are motivated to establish their own enterprises because of the potential profits. If the company succeeds, the proprietor is not obligated to share the profits with others. - Complete Control of Everything
Another benefit of sole proprietorships is that owners have complete control over their enterprises. This means they’ll be able to react rapidly to market shifts. Entrepreneurs value this level of autonomy. Sole proprietorships can make quick, flexible decisions to make the most of unexpected opportunities - Discontinuation is Simple
Sole owners can quickly shut down their businesses and pursue other sources of income. They must, of course, pay all debts and other responsibilities, such as taxes, but they are exempt from any other legal duties in order to cease operations. - Pass-through Tax
Sole proprietorships are usually not taxed as cooperation. Instead, the tax burden is passed to the business’s sole owner, who is responsible for paying income tax on profits. This means reduced filing requirements since the business itself does not need to file taxes. There are however some IRS forms that must be filled each year.
Disadvantages
- Personal Liability is Limitless
The most significant disadvantage of operating as a sole proprietor is unlimited personal liability. The legal need to pay debts is known as liability. All business debts are totally and personally liable to sole proprietors i.e. If the company fails, the owner may be forced to sell personal property to pay off any outstanding debts. There are certain ways to protect yourself though while still enjoying many of the benefits of a sole proprietorship. One popular method is by registering a single-member LLC. - Limited Access to Resources
If your web design firm takes off and grows quickly, you may need to expand by purchasing additional computers or recruiting additional employees. You may have to expand as a sole proprietor by paying for equipment out of your own pocket. This is due to the fact that banks are occasionally hesitant to lend money to start-up businesses, and if they do, they will be lending it to you personally, meaning they can pursue you personally if you don’t make your payments as agreed. - Lack of Stability
The lifespan of a sole proprietorship is limited. The business simply ceases to exist if a lone proprietor dies or stops shopping due to retirement, sickness, lack of interest in the firm, or any other reason.Employees are difficult to come by and keep for sole proprietorships. Small businesses are unable to provide the job security and promotion chances that many employees need. Furthermore, many sole proprietorships are unable to provide fringe benefits to their employees.
What tax forms do I need to file for a sole proprietorship?
Because the business and the individual are not taxed separately, sole proprietorship taxes differ from that of other business entities such as corporations. Your sole proprietorship taxes are instead reported and paid as part of your personal tax return.
To explain, the IRS refers to this sort of taxation as “pass-through taxation” since the tax responsibility is borne by the business owner and “passes through” to the owner’s personal tax return. This means you’ll need to fill out a separate Schedule C form for your sole proprietorship taxes, which you’ll file with your personal income tax form, Form 1040. Depending on where your business is run and controlled, you might need to complete additional papers. The best option is to speak with an accountant.
How many employees can a sole proprietorship have?
Employees can be hired by a sole proprietor. There is no limit to how many employees you can hire. You are responsible for all aspects of employment administration, recordkeeping, and taxes as an employer. You are held to the same standards as any other employer. Before hiring employees, you must get an employer identification number (EIN) from the IRS. An EIN is very simple to obtain. You can receive one right away by filling out an application on the IRS website. An application can also be sent by fax or mail.
All essential employment paperwork, such as Form W-4 and Form I-9, must be completed by the employee. You could also ask the employee to fill out benefit applications.
When the owner of a sole proprietorship dies, what becomes of the business?
A sole proprietorship is effectively shut down upon the death of the owner, and all assets and liabilities pass through his estate.
A sole proprietor’s will can direct the business to a specific beneficiary, however, this results in the formation of a new sole proprietorship (or partnership if more than two beneficiaries).
The sole proprietor’s business will be wound up during the probate procedure if he dies without a will, and his assets will be split among his heirs.
What is the difference between a sole proprietorship and an LLC?
A limited liability company (LLC) is a state-created legal entity. An LLC exists independently of its members or owners. Members, who are not individually liable for business debts and obligations. Instead, the LLC is liable. This separation between the owner and the business is referred to as the “corporate vale”.
A sole proprietorship is an unincorporated business owned and operated by a single individual. This is the simplest structure available, with no mess and no fuss. You are entitled to all of the company’s profits. You are, however, accountable for all liabilities, unlike an LLC.
What is the difference between a sole proprietorship and a partnership?
The traditional business arrangements of sole proprietorships and partnerships are easy for their owners to set up and maintain. The main distinction between them is the number of owners.
You are the single owner of a sole proprietorship (in some states, your spouse may be a co-owner). When you create a partnership, at least one co-owner will be required. Managing disagreements among owners and allocating responsibilities, earnings, and losses are all considerations when you own a firm with someone else.