Faced with countless business types with varying characteristics, benefits, and disadvantages, why start a sole proprietorship instead of other business forms? To follow is a summary of some of the most important advantages that the sole proprietorship offers to the owner.
How easy is it to start?
There are extensive benefits of sole proprietorship, the most significant being the ease of formation. In essence, you are cogitated as a sole proprietorship the moment that you start delivering goods and services to clients. As such, the sole proprietorship will keep going for as long as you provide goods and services to others. In this business type, the business is also very easy to disband.
As expounded upon by the U.S. Small Business Administration, no formal application is required, and registration is not mandatory. It is simply the easiest and most frugal method of founding a business. There are no legal agreements that need to be set up as you are not in business with another individual. There is no need to construct a formal business structure as there will be no other stakeholders – there is no board of directors nor a need for intricate accounting because of the distribution of shares. By definition, the sole proprietorship is run by only one person, but there is the possibility of hiring employees. In this case, the owner has to apply for an Employer Identification Number (EIN). However, this process is also fairly simple and can be done online through the IRS website, via fax, or by mail.
Is the process expensive?
A substantial benefit is that the costs of starting up a sole proprietorship are marginal and legal costs specifically are restricted to the procurement of the required licenses or permits. These depend on the state where you will run your business, the industry that your business falls under, and the locality of the business. Should you wish to know more about the federal, state and local permits, licenses and registration that you may require, use this Licensing and Permits tool to help you.
Which businesses make for good sole proprietorships?
Businesses that are easily run by one person are prime examples of what could make good sole proprietorships. Some examples of these are artists, counsellors, freelancers, independent contractors, tutors, and musicians. Other businesses that function ideally as sole proprietorships are bed and breakfasts, bookstores, custom treehouse businesses, hardware stores, art galleries, and music lesson businesses.
As you are the sole owner, an added advantage of the sole proprietorship is the idea of complete control. As the singular owner of the business, any and all decisions relating to the business are in your hands. You are not obligated to confer with relevant stakeholders when you have the need, or the desire, to change operations. However minor or major the decision might be, the onus falls on you to see what works best in your business. This allows for your personal interests and strengths to take center stage and become apparent in your business plan.
How do I file taxes for my sole proprietorship?
A major value of the sole proprietorship is that the business is not taxed separately because there is no legal separation between you and your business. As such, it’s relatively simple to satisfy the tax requirements for a sole proprietorship. Your business income as an owner is incorporated into your personal tax return. It is important to remember that as you are considered self-employed, you do have the responsibility to pay both income tax and self-employment tax annually. However, compared to other business forms, there is the benefit of only being taxed once. Other business entities are often subject to “double taxation” where the business’ income is taxed once when the profit is made and again when the profit is distributed to the owners.
An added benefit is that the tax rates are at the lowermost of the business structures. Furthermore, as you are filing your sole proprietorship on your personal tax return, you are able to use any business losses to counterbalance personal income from alternate sources.
Are my business dealings subject to public disclosure?
In a sole proprietorship, the issue of privacy is also addressed and seen as a big benefit. A sole proprietorship does not have to file any formation documents or year-to-year reports to federal and state governments. As such, unlike with LLCs or corporations, your business will never have to publicly disclose its operations.
TRUiC expands on the advantages of sole proprietorships so it will be useful to visit this site for more information, as well as examples of business ideas which are ideally suited to sole proprietorships and how to start one.