What Is A Sole Proprietorship?

Answer:
The oldest form of business structure in use today is the sole proprietorship.

An example would be the corner mom and pop book store. This is the most basic form of all business structures. Often, when someone starts a small business, this is the form they will choose, as it is the easiest and least expensive to set up.

Its most basic definition is that it is a form of business without corporation or limited liability status. The individual who owns the business completely represents the business, both legally and fully. Common sole proprietorship examples are part-time businesses, direct sellers, new startups, contractors, and consultants.

Some advantages of a sole proprietorship are as follows:

- Faster Tax Preparation: Taxes for a sole proprietorship are generally much easier than it is for a corporation. All you generally need to do is to file an individual tax return (IRS Form 1040), documenting your business losses and profits. Your personal individual income and business income are treated the same, and self employment taxes will apply to the business income.

- Lower Startup Costs: Most business have very limited access to capital when they start, and usually for some time after they begin. A corporation will have higher startup fees and special forms that must be filed with the government. It is also usually necessary to involve a lawyer when setting up a corporation, which adds additional costs.

- Ease of Money Handling: With this business type, handling money for the business is easier than with other business structures. You don’t have to set up a payroll system in order to pay yourself. You should also set up a separate business checking account in the business name to keep your business funds separate as well as to avoid mixing up personal and business finances.

A sole proprietorship is not without its disadvantages. Some disadvantages are:

- Personally Liable: Your sole proprietorship is liable for all debts and activities of the company. However, unlike a corporation or LLC, a sole proprietorship does not exist as a separate legal entity from your personal self. All of your personal assets and wealth are also interlocked with the business. If you are in a higher risk business, or if you have a lot of assets, you may want to seriously consider a corporation structure rather than a sole proprietorship.

- Lack of Financial Controls: The requirements of a sole proprietorship are must less stringent than they are for a corporation. Financial statements and maintaining company meeting minutes are not required as they are of a corporation. The lower requirements can take the company down. No matter what the requirements are, take the time to set up the proper financial statements for the company so you can see what is happening with the business financially.

- Lonely At the Top: All of the business decisions, actions, and results rest in your hands. This can be both a blessing and a curse.

- Difficult to Raise Capital: Think of your business over time. Growing a small business will require cash in order to take advantage of new markets and new business opportunities. Outside investors rarely will risk their money with a sole proprietorship.

The IRS will consider your business to be a sole proprietorship unless you have registered it as a corporation or another business structure such as an LLC. You do not have to register your business in order for it to be a sole proprietorship. If you plan to use a business name for your company, some states will require you to register the name as a trade name or will require you to file the name registration with the state.


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