Many dream of starting a business, but there are many things to consider before establishing one. One of the most important is business structure. A business structure is a legal structure that affects the business's day-to-day activities. It serves as a key factor in determining the activities it can undertake, like raising capital, the responsibilities and obligations of the business, and the amount of tax the business owes to tax agencies. 

There are different types of business ownership, but this blog will focus on what a sole proprietorship business is. A sole proprietorship business is one of the simplest types of business structure, among many others. It is a non-registered, unincorporated business that one individual runs with no distinction between the owner and the business. Let's look into this type of business structure in more detail. 

What is a Sole Proprietorship Business?

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A sole-proprietorship business is one of the simplest business structures, as the owner and the company are fully integrated. There is no legal separation between the two, so the sole proprietor controls the company and receives all financial benefits. However, in addition to financial benefits and profits, the sole proprietor has to take on all liabilities, risks, debts, and losses. 

From a tax perspective, the profits and losses associated with sole-proprietorship businesses are included in the tax return. There is no need to file separate income tax returns because the business does not exist as a separate entity from its owner. 

Also, there is a minor distinction between owner and sole proprietor. If you are wondering what a sole proprietor is, it specifically refers to the individual owner of the business being run as a sole proprietorship. However, the owner can be either a legal entity or a person who is the legal proprietor of the business. For example, a corporation (a legal entity) can own one or many companies. 

Key Features Of Sole Proprietorship

A sole proprietorship business has various key features that make it different from other businesses. Let's look at the key features of the simplest business structure to understand completely what a sole proprietorship business is.

1. Sole Ownership

A sole proprietorship is owned and run by a single person, which is its most unique feature. Unlike a partnership business, a single person is in charge of every aspect of the company. 

2. Personal Liability

The owner and the company are considered a single legal entity. Therefore, all the company's debts and liabilities are fully and exclusively owned by the owner. If the business cannot repay the debts, the sole proprietor has to settle the debts with personal assets such as individually owned property, shares, etc.

3. Direct Authority

Owners who operate alone have the overall authority over the company, from overlooking day-to-day tasks like getting a loan for the small business to creating long-term strategies like go-to-market strategy or business finance plan. The owner is free to execute the plan without seeking approval from any board or partner because no one is involved other than the sole proprietor.  

4. Flexibility

Flexibility helps any business respond quickly to the ever-changing market, and sole proprietorship makes it possible. In this business structure, since the sole proprietor can make any decision, it is easy to execute and implement them. However, in the case of a partnership or corporation, it is first essential to get permission from all the other entities involved in the decision-making process before executing it. 

5. Easy Formation

Sole proprietorships are easy to form as they involve less paperwork and legal fees. In some situations, obtaining a permit and license for the company is enough to operate legally.

6. Privacy

When compared to other business structures, sole proprietors have more privacy. The owner can maintain a certain level of confidentiality as they are not required to publicly reveal complete financial or operational details.

7. Income Taxation

A sole proprietorship has simple taxation requirements, as the profit and losses from the business are charged to the owner's personal income tax return. This option is advantageous for those who want their taxation to be simple. Here are two things that a sole proprietor needs to keep in mind: 

• You will be taxed on all the profits the business earns, whether you withdraw the money or not. 
• You must fill out Form 1040 and Schedule C reports, which detail your profits and losses. You must also fill out Schedule SE, which refers to your self-employment taxes. 

8. Retain Profit

Unlike other businesses, there is no need to share profit among other partners as you are the company's sole owner. In addition to profit, all losses are also borne by the owner.

Setting Up A Sole Proprietorship

Let's understand the process of setting up a sole proprietorship business: 

Step 1. Set up a Unique Business Name.

Choose a unique name for your business that shows your brand identity. Verify that the selected name is available and not used by any other business by checking on the Secretary of State's website or office in your state.

Step 2. Register Your Company with a State Agency.

Depending on your state, you might have to register the company name with the relevant state agency, which could be the State Department or another appropriate agency.

Step 3. Apply for Relevant Business Permits and Licenses.

Check with the relevant local and state authorities to determine if your company needs licenses or permits. The requirements differ depending on your business type and location. Consult business lawyers to get the right information regarding what permits are required. 

Step 4. Get EIN from the Internal Revenue Service. 

It is advised, though optional, that all sole owners get an EIN (Employer Identification Number) from the Internal Revenue Service (IRS). A sole proprietor without employees who are not required to file the excise tax return and have not established a pension, profit-sharing, or retirement plan is not required to get an EIN. 

Step 5. Set up a Payment Account.

Create a bank account for your sole proprietorship to keep your personal and business finances apart. Most banks need your EIN and supporting documents to open a business account.

Step 6. File a DBA.

If you do business under a name other than your legal name, you might have to file a DBA (doing business as) with your local government. This is sometimes referred to as a fictitious business name or trade name.

Step 7. Get Familiar With Tax Liabilities.

Understand your tax responsibilities, such as self-employment and income taxes. Also, it is best to maintain detailed records and prepare outlays of your earnings, profits, debts, and everything else to facilitate tax preparation from the start. It will keep things organized and make your work easy during tax filing. 

Advantages vs Disadvantages of Sole Proprietorship Business

A sole proprietorship business has advantages and disadvantages like any other business structure. Here's a quick recap of all the pros and cons associated with proprietorship business so aspiring individuals and entrepreneurs can make a well-informed decision: 

Advantages 

1. A sole proprietorship business can be established quickly with little paperwork and legal requirements. All you require is a strong business plan and strategy. 
2. A sole proprietorship business can adapt quickly to the changing market because the owner controls all operations and decision-making.
3. Income and losses from the business are charged to the owner’s personal income tax return, which makes it easier to file taxes.
4. Communicating with clients and customers and cultivating better relationships with clients becomes easy as the owner is the only decision-maker. You can connect with your clients by sending business emails. 
5. It is simple to manage and run a sole proprietorship as no formal organizational structure is needed. 
6. Sole proprietors have more privacy because they are not required to disclose papers publicly.
7. The operating costs are minimized as there is no need to pay formation fees for partnerships and companies.

Disadvantages

1. The owner directly bears all debts and liabilities, and all the personal assets are at risk in case of non-repayment of the debts.
2. It may be difficult for sole proprietors to raise capital from the market and frequently dependent upon loans or personal funds. 
3. Running a business requires expertise in different departments, and a sole proprietor can only bring a handful of knowledge. It may become difficult to make informed decisions in areas the sole proprietor does not know much about. 
4. It might become hectic for a sole proprietor to handle every client once the business grows and flourishes.  
5. The lack of assets, funding, and expertise may hinder business growth.
6. The owner is alone responsible for the success or failure of the company.
7. Due to its heavy reliance on the owner, the business is prone to the owner's ability, availability, and health.

Is Sole Proprietorship Right For You?

Depending on the nature of the business, your ability to handle risk and your goals for future growth are some of the deciding factors if sole proprietorship is a right fit for you or not. You can keep the following things in mind before coming to a decision:

1. You want to start a small business with no partners.

If you want to start a small business and don’t want any partners, sole proprietorship is the best option as it does not require a high capital investment.

2. You want freedom and overall control of all the business activities. 

A sole proprietorship offers you freedom and independence to make any decisions related to the business growth. You have the overall control of the company and the independence to do anything.

3. You require flexibility in business operations.  

A sole proprietorship is more flexible than any other business since there is no need to ask boards or partners before making any changes to the plans. There is no need to follow a formal procedure before amendments to the planned structure.

4. You dream of becoming a solo entrepreneur.

A sole proprietorship makes sense if you would instead manage a company independently, depending on your skills and abilities, and you don’t want interference from any other person.

5. You aim to open a business that requires you to connect with clients on a personal level. 

A sole proprietorship directly connects with the customers, which can be a beneficial factor if a person wants to start any business that requires direct communication.

Wrapping Up

A simple and convenient way to establish a business is to start as a sole proprietor. However, knowing everything about setting up and managing a sole proprietorship business is essential before getting into a sole proprietorship business. It is necessary because the sole owner will be responsible for the fall or rise of the established venture. 

Even though this business structure is simple, business owners must also consider its advantages and disadvantages and see if it fits their objectives. Entrepreneurs need to consider myriad aspects for long-term growth when selecting the best business structure.

A sole proprietorship business is the first and most effective step for many entrepreneurs to gain practical experience, which can open doors to further expansion and growth. Once you have covered all the aspects of this business, including benefits, drawbacks, and features, you can easily set up your business and work towards driving growth and expanding it to new horizons. 

Frequently Asked Questions

1. How is sole proprietorship different from other business structures?

A sole proprietorship has a single owner, which makes the business and owner a single entity, unlike other businesses. The owner handles all the liabilities and assets, and no partners exist. The owner bears the profits and losses of the company and is not divided among all the partners like in other business structures.

2. What are the key features of a sole proprietorship business?

One of the main advantages of a sole proprietorship is that the owner has complete control over the business, it is easy to start, all liabilities are the responsibility of the owner, it offers great flexibility, and has simple tax implications.

3. What are the advantages of a sole proprietorship business?

The advantages include complete control over the business, easier filing of tax returns, establishing direct relationships with the customers, and easier establishing the business.

4. What are the disadvantages of a sole proprietorship business?

The basic disadvantages are scarce capital resources, lack of expertise in some areas, and the possibility of business discontinuity if the owner becomes insolvent. Before starting any business, it is important to consider its drawbacks to select the best business structure.