What is a Sole-Proprietorship Business?
Have you ever thought about starting a business? Do you know what kind of business form you’d like to have? There are three main types of businesses: sole proprietor, corporation and partnership. This article explains what a sole-proprietorship business is, and its advantages and disadvantages.
A sole proprietor is a person who solely owns a business and is responsible for its debts. According to TaxFoundation.org, in 2017 there were 23 million sole-proprietorship businesses in the United States. This was compared 1.7 million corporations and 7.4 million partnership businesses. One of the reasons for its popularity is because there is little formal action required to form a sole proprietorship business. Of the little formal action, important steps include being the sole owner of the business and obtaining necessary licenses and permits for your business to function (SBA.gov).
There are many benefits of having a sole-proprietorship business, ranging from its overall simplicity to unemployment tax benefits. A person can establish a sole proprietorship instantly and inexpensively, and the business can carry little ongoing formalities.
Regarding taxes, a sole proprietor isn’t required to pay unemployment taxes on themselves, but they are required to pay them on their employees. For profit/loss tracking, a sole proprietor must report their income, losses and/or expenses with a Schedule C and Form 1040. From there, the “bottom-line amount” from the Schedule C is transferred to the owner’s personal tax return (Entrepreneur.com).
Disadvantages and obstacles to being a sole proprietor include having assorted personal liabilities and a more difficult means of raising money for the business. An example of unlimited personal liability is the lack of legal separation between an owner and their business: any debts or obligations made through the business will hold the owner personally liable as well (SBA.gov). If someone is injured in a business-related accident, a resulting negligence case can be created against the owner and their personal assets (e.g. home, bank or retirement accounts, etc.).
Another important disadvantage to sole proprietorship is the difficulty of raising funds for the business to perform. Sole proprietorships can’t develop funds through business stocks and can even be perceived as big risks by banks regarding repayments in case the business fails (SBA.gov). With obstacles of raising business funds and an owner’s personal liability risks, another possible obstacle can be the burden the business might have on the owner. If you’re interested in creating a business with a sole proprietorship, it’s important to consider all of the advantages and possible disadvantages involved.