In simple terms, a company started by a single person, whether natural or legal, that has the necessary characteristics to carry out the management of a business is known as a Sole proprietorship.
The key feature of the definition of what is sole proprietorship is that, unlike an incorporated business or partnership, there is no legal separation between the business and the owner in a sole proprietorship: the business is considered an extension of the owner, and as such, the owner is personally responsible for the debts or obligations incurred by the company.
There are several different types of business structures, but if you are alone, you can consider being a sole proprietorship.
A sole proprietorship is a type of business in which there is a sole owner of an unincorporated business that acts and operates as the business. Think freelancers, artists, contract workers, and other small business owners.
It is the easiest way to start a business, but you still need to be aware of what you are assuming. If you are thinking of looking for a sole proprietorship, read on to learn more, right here on Nairalanceblog.
Who Should Consider a Sole Proprietorship Business?
If you are just starting a business, and there are no other owners or partners, a sole proprietorship might be your best option at first.
Please note that as a sole proprietor, you are personally liable for any of your business debts and losses.
A sole proprietorship may be a good option for freelancers offering a service or selling a product.
There are no barriers to entry or application to complete, making this a good choice for a new one-man business.
But keep in mind that as a sole proprietor, you are personally liable for any of your business debts and losses. That means if you can’t pay a business debt, your personal assets could be compromised.
How Does a Sole Proprietorship Work?
Anyone building their side job or running a business on their own can be considered a sole proprietorship, even without filing any paperwork.
You may not even consider yourself a business owner if you offer additional tutoring, but when you are making money, the government will likely consider it a business activity, whatever that is.
Technically, sole proprietors can hire employees, but by their very name, sole proprietors are usually sole proprietorships.
As a sole proprietor, you are responsible for saving for your own taxes and making any necessary estimated tax payments. Your tax return is filed with your personal taxes, because in the eyes of the IRS, you are the business.
While being a sole proprietorship has many benefits, there are some important things to know.
That is, since there is no distinction between you and the company, you are personally liable for any financial loss, debt, and damages in the event of a lawsuit.
How to Become a Sole Proprietor
If you’ve decided that sole proprietorship is the right business structure for you, you might be wondering how to make it official. The good news: you don’t have to do much.
Be sure to research any licenses or permits you may need that are specific to your industry or required by the federal government or your city or state.
As a sole proprietor, you can usually use your own Social Security number because there is no legal separation between you and your business.
But if you want a bit of separation of your personal information or are looking to build your business credit, you can apply for an employer identification number.
An EIN is similar to a Social Security number, but is used by businesses for tax filing. As a sole proprietor, if you have an EIN, you probably won’t have to give out your Social Security number as much, and that can help reduce the risk of identity theft.
And if you intend to hire an employee, you will need to get an EIN anyway.
Advantages of Sole Proprietorship
A sole proprietorship is the easiest and least expensive form of business to establish and operate.
If you operate your business under your own name, without additions, you don’t even need to register your business name to start operating as a sole proprietor.
This makes the sole proprietorship ideal for startups, independent contractors, and part-time and home-based businesses.
• 100% owned
As a sole proprietor, you own 100% of the business and can make all the decisions. Unlike corporations, sole proprietors are not required to hold shareholder meetings or vote on management issues.
• Hours on your schedule
A sole proprietor can manage their own hours and hours of operation (depending on clients’ requirements).
Depending on the type of business, the work environment can be adapted to the owner’s requirements.
• Simpler tax and accounting
Sole proprietorships are much simpler to operate from a tax and accounting perspective. As a sole proprietor, you do not need to file a separate business tax return; All income generated by the business is reported on the personal tax form.
The business owner receives all the benefits directly.
As with other forms of business, as a sole proprietor, your expenses related to the cost of doing business are fully deductible from income tax, as are travel expenses, automobile expenses, advertising, and a portion of expenses from your home if you are operating a business from home.
• Deductible business losses
Business losses can be deducted from other forms of income or carried forward or backward, so a sole proprietorship that loses money in the early years can deduct losses against personal income, making it ideal for those who want to spend from employees to self-employed over a period of time.
Disadvantages of a sole proprietorship
Being self-employed in a sole proprietorship can seem stranded on a desert island. it often means not having employees or partners to discuss business issues, explore new ideas, or interact with them in a social way.
There are other significant downsides as well.
• No legal separation
As mentioned above, with a sole proprietorship there is no legal separation between you and the business.
This means that if the business fails and you incur debt, your personal assets, including your home and any other assets registered in your name, could be confiscated to discharge liabilities (which can be unlimited).
Similarly, if you are sued for damages caused by accident or negligence in the course of your business activities, your personal property may also be seized.
• exposure to liability
If your business activities could expose you to substantial liability, a sole proprietorship is probably not an appropriate form of business.
With an incorporated business or partnership, the personal assets of the owner (s) are separated from the assets of the business and, as such, are protected against seizure of liability or debt obligations.
As with all forms of business, it is very important to have sufficient business insurance.
• Business income reports as regular income
While tax simplicity can be an advantage for sole proprietors, it can also be a disadvantage in terms of flexibility, as all business income must be reported as regular income in the year it was earned.
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Incorporated companies have much more flexibility in terms of how and when owners are paid.
• Difficult to get contracts
Some companies, government agencies, consulting groups, etc. will not deal with unincorporated companies, either because they consider that a sole proprietorship does not have the same level of legitimacy and professionalism as an incorporated company, or that hiring a sole proprietor increases the risk of Tax authorities treat the person as a employee rather than an independent contractor.
• Harder to raise capital
Raising capital is more difficult for sole proprietors. Incorporated companies can obtain equity financing from angel investors or venture capitalists by selling shares in the business.
• Hard to sell business
Sole proprietorships can be difficult to sell as the business is completely tied to the owner. As there is no distinction between the assets of the owner and the assets of the business, proper valuation of the business can be difficult to achieve.
The death of the owner’s long-term illness can render the business worthless. Customer loyalty resides with the original business owner and cannot easily be transferred to a new owner.
Unless the sole proprietor has friends or family who can continue to run the business, illness or injury can affect the continuity of the business.
Depending on the workload, it can also be more difficult to get time off for vacations or family problems.