A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business.
Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can’t sell any stock, and banks are hesitant to lend to sole proprietorships.
Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business. This business structure is the easiest structure to create, which can be highlighted by the fact that The Tax Foundation found there are 23 million sole proprietorships in the United States alone. This statistic is compared to the 1.7 million C corporations and 7.4 million partnerships and S corporations in the country. As the sole proprietor, you have lower startup costs and more freedom when it comes to making decisions for your business. However, you are completely liable for any debts or liability issues, which makes your personal assets vulnerable.
- Ownership- As the name says, there is only one sole owner in a sole proprietorship. As the sole owner, there is no distinction between the business and the individual. This means if your business faces bankruptcy or liabilities, your personal assets can be used as collateral and be taken away from you to settle tax and other debts.
- Formation- If you want to be a sole proprietor, all you must do to create a business is to obtain the right licenses, permits, and registrations required by your state. Like all businesses, however, it’s important you have a thorough business plan, enough funds, and small business grants to make a profit and be successful.
- Taxes- When Uncle Sam comes knocking at your door, you have to report your income, losses, and expenses on IRS Schedule C Form 1040.
- Examples- Restaurant owners, repairmen, childcare workers are often structured as sole proprietorship businesses.