Sole Proprietorship – Learn More About It
A business that can be owned by either a company or an LLC, or controlled by an individual is called a sole proprietorship.
The first thing you should learn is that there are no partners in this type of business.
The means of a sole proprietorship is the easiest and the most common structure to choose from.
You, as a business owner, are entitled to all profits that your company makes. Also, you are responsible for all your debts that may occur, and any possible loss or liability.
In this article, you can learn what is a sole proprietorship and if it’s the right fit for you.
What Is the Real Meaning?
To explain it more, a sole proprietorship is a type of structure that refers to any business with one owner.
For example, if you own a small business and are the only one in charge, you are the sole proprietor of your company.
An LLC or Limited Liability Company is nothing like a sole proprietorship.
With that in mind, many sole proprietors end up shifting their business into LLCs, when they are ready to scale up.
It is common for partnerships to split between two or even more people. And corporations are owned by their stockholders and have boards running them.
On the other hand, sole proprietorships, are approximately easy. You can have many employees in your business, but if you are the only owner, you have a sole proprietorship as your business plan.
You should also be aware that if your business doesn’t require any licensing, you can start immediately.
Everything You Need to Know About Taxes
So now that you are a sole proprietor, you will need to report any business income on the Schedule C form. You will need to file your personal income tax return.
Also, you will need to pay state income tax, as well as federal, on your business profits.
To explain it better, if you are an employee, your employer must pay half of your Social Security taxes. A business owner will also need to withhold the other half of your pay.
To avoid any fees or a massive tax bill, you as a business owner should pay estimated taxes on your self-employed income.
Furthermore, you will need to report any income and loss that may happen with a standard Form 1040.
What Are the Advantages of a Sole Proprietorship?
There are a few advantages to having a sole proprietorship, and they are:
- Simple and cheap to form: If you are thinking about having this type of business entity, one thing that may help make a decision is the fact that it is the simplest and the cheapest business entity to establish.
- Only you will have complete control over your business. Because you are the only owner of the company, naturally, you don’t have to compromise. You can make any decision and not consult with anyone.
- Tax preparation has never been easier. When having a sole proprietorship, your business is not going to be taxed separately. So, it’s fairly easy to fill the tax reports for this entity. Having that in mind, you should also know that tax rates are the lowest for this business structure.
A Few Disadvantages of a Proprietorship
Not everything is always perfect, so here are some disadvantages when having this type of entity:
- You should keep in mind that because there is no legal difference between you and your business, you as an individual can be accountable for any debt that may occur.
- It is a little bit harder to raise money. If you choose this type of business entity, you should know that it’s a long process while trying to raise money. You can’t sell stocks, which reflects on your opportunity with potential investors. It is also much harder to get a loan from a bank since they are hesitant to lend to a sole proprietorship. This can happen if the bank thinks that you are not able to repay the loan if your business fails.
- It can be a heavy burden. The downside of complete control over your business is that it can also put a lot of pressure on you.
You, and you alone, are basically responsible for any successes and failures as well.
Think About Your Choices Seriously
After gathering all of the necessary information, you can decide which business entity works best for you. Just make sure you’re confident in your decision before you go with the next step.
On the other hand, if you have already created your business plan, and it involves employees or some concerns about liability, you might reconsider and choose another option, for example, an LLC.
In conclusion, a sole proprietorship is the best option for you if you want to start your business immediately.
If you’re still having doubts about sole proprietorship – contact us today and let us help you!