Sole proprietorships are the most common business type in the United States. In 2015, the Census Bureau estimated there were over 21 million registered sole proprietorships in the United States. Sole proprietorships are popular because they are so easy to set up that many entrepreneurs accidentally become sole proprietors.
Sole Proprietorships Are Very Easy to Set Up
In many cases, entrepreneurs do not even know that they are operating a sole proprietorship. That’s how easy it is to set up one. You see, if you have not incorporated your business and you are the sole owner, it is automatically classed as a sole proprietorship. So, for example, if you are a freelance researcher, then, you are also a sole proprietor, even if you did not actively decide to become one.
However, it is important to realise that if you are the sole member of a limited liability company (LLC), you are not a sole proprietorship if you treat the LLC as a corporation.
If you are a sole proprietor, then, you assume complete responsibility for the assets and liabilities of your business. There is no difference between you and your business. If a client is unhappy with you, he can sue you personally.
Just because being a sole proprietor is an automatic designation for sole owners of unincorporated businesses, does not mean that there is no reason to incorporate. Registering your business gives you access to a business licence, and any permits you may need from the local, state and federal government.
The Benefits of a Sole Proprietorship
Not only are they super easy to set up, they also provide you with numerous advantages that other business structures do not.
Firstly, they are pretty cheap to set up. True, whatever business structure you are setting up, you need to consult a lawyer and maybe even an accountant, the actua;l fees of setting up a sole proprietorship are very low and the procedures so simple that many people choose not to consult a lawyer. And, you can easily dissolve a sole proprietorship, or put it on ice: you simply stop working.
Secondly, it’s comparatively easy to file tax returns for a sole-prop. This is because your income from your sole proprietorship gets added to your personal income and you get taxed for both. This is done by using Schedule C for your tax returns and then transfering the bottom line figure to your personal returns. According to the Small Business Administration, sole proprietorships have the lowest tax rates of any business structure.
Sole proprietorships allow you a degree of control that no other business structure can rival. As a sole proprietor, you are the sole authority in the business. You don’t have to consult any partners or shareholders. You can make decisions at the drop of a dime. As a sole proprietor, you are not limited to using your own name. You can apply for a “doing business as” (DBA) name, which allows you to use a company name, assuming the name you choose is available.
The Downsides of Using a Sole Proprietorship
Although there are many advantages of using a sole proprietorship.
Firstly, it takes a lot of effort to successfully run a business on your own. Many sole proprietors find that they have to sacrifice their social lives and often, aspects of their family life, in pursuit of their business goals. Long hours, and burnout are distinct possibilities.
Some sole proprietors try and balance their day jobs and their sole proprietorships and end up sacrificing their sole proprietorships.
It’s important to realise that there is no segregation between you and your businesses. So, whatever liabilities your business incurs, can be held against you. So, for example, if your business owes money to the bank, the bank can go to the court and the courts compel you to pay those debts even if that means using your personal funds.
ALso, banks are often weary of lending to sole proprietorships.
Also, because you are a sole proprietorship you cannot issue shares like a normal corporation. This limits the amount of funding you can get.
With a sole proprietorship, it is impossible to bring in a partner. If you want to take on a partner, you will have to change the business’ structure.
Lastly, a major reason that sole proprietorships are so common is that entrepreneurs use this structure as a transitional structure in the early days of their business. This is because of the ease with which a sole proprietorship can be created, and the low costs of setting up and running a sole proprietorship. At a later stage, a sole proprietorship becomes inconvenient to have and its limitations begin to stand out. At this point, entrepreneurs often seek recourse to lawyers who can transform their sole proprietorships into corporations, limited liability companies, or partnerships.