What is a Sole Proprietorship?
A sole proprietorship is the simplest business structure because it involves only one person, the business owner. He or she has no partners and is responsible for all decisions, debts, and other things related to the business. It is an easy business structure to setup, and many small businesses begin as a sole proprietorship.
How to Start Sole Proprietorships
Starting a sole proprietorship is easy, though different states will have different regulations regarding the process. Many times, all it takes is filing a DBA, or “Doing Business As” form with the county Register of Deeds. This will allow the sole proprietor to use a business name other than his own for business purposes. This is necessary if a sole proprietor wishes to do business in any name other than his own, and will help establish the entity separately of the person for accounting purposes.
Depending on the nature of the business and the location where it operates, other permits and forms may be necessary to file. Check with your local Small Business Administration to ensure you are in full compliance with all local, state, and federal guidelines.
Advantages of Sole Proprietorships
There are several advantages to a sole proprietorship:
- Accounting is easy: A self-employment tax is applied to all business profits made, at a flat federal rate of 15.8%. This is much less complicated than corporate taxes.
- Less regulation: Generally speaking, sole proprietorships have less legal issues to concern themselves with, because they don’t have to worry about employees and other issues larger businesses must handle.
- Easy to start: Less paperwork is required to start these businesses than others.
- Easy to dissolve: Because only one person is involved with the sole proprietorship, it is easy to dissolve if and when the person decides to stop operating as a business.
Disadvantages of Sole Proprietorships
Before starting a sole proprietorship, you may want to consider these disadvantages to this kind of business structure:
- Responsible for all capital: As one person, it can be hard to get all the capital you need to start and maintain the business.
- Responsible for all health insurance and benefits. Unlike being an employee with a company that has benefits, a sole proprietor is responsible for all of his health insurance. It may be difficult to afford for some sole proprietors and may cause issues for family members of the sole proprietorship.
- As the business grows, so does the risk. Because the sole proprietor is responsible for all the business transactions and even his personal assets will be considered in settling business debts, he or she poses a lot of risk as the business grows and becomes successful. This is why many businesses change their structure later.
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This post is part of the series: Forming Your Business Structure
When starting a new business choosing your business structure is a very important function. This series at Bright Hub will help you learn why is a sole proprietorship a Good Business Structure and help you learn about forming an LLC or forming an S Corp. Read on to find out more about the basics of