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What is a Sole Proprietorship and Sole Proprietorship Advantages

 

If you are a self-employed individual, then forming your business as a sole proprietorship is the most common (and also easiest) way to start your new venture.

Know What is a Sole Proprietorship

There are tax advantages and disadvantages to weigh when deciding between this and forming a corporation or limited liability company. Some people have the mistaken belief that if you employee a certain amount of people, then you must form a corporation, but this is not true. The decision has more to do with tax reasons and personal liability reasons. A sole proprietor is not recognized as a separate legal entity the way a corporation or a limited liability company is.

For instance, if you are a Sole Proprietorship, then you pay taxes only once, as if you and the business are the same entity. You will also be personally responsible for paying all the business debts you incur. There is no separate entity. In a sole-proprietorship, keeping seperate accounting records for business and  personal assets and liabilities is not required even though it is a good practice to do so. Note that there is no legal distinction between them.

Bear in mind that business debts in a sole proprietorship can be satisfied with your personal assets as well. This can be very scary to a lot of new business owners, and many cite this fact as the deciding factor in electing to incorporate or form an LLC.

Another distinction between these types of businesses are that a corporation will be subject to taxes on that entity's behalf, as well as the owner paying taxes as well. Many refer to this as double taxation. A corporation will, however, shield the owners from personal liability in the case of a lawsuit or satisfying other business debts. This is called the protection of the Corporate Veil, and many people desire this, especially if they are involved in very profitable, or very risky ventures.

Some additional advantages of sole proprietorships are that these individuals will have a much easier time with their accounting records. Also, the IRS does not require a separate corporate filing at tax time. The cost of forming the business will be a little less as well, because the state will not require Articles of Incorporation or other registration papers to be filed.

The advantages of a Sole Proprietorship:

  • You have the greatest control over business decisions, since typically you have nobody else to answer to.
  • A Sole Proprietorship is easily formed and dissolved, requiring little in the way of legal formalities.
  • Accounting is much simpler. Tax forms are usually only 1-2 pages long, and recent changes in tax laws allow Sole Proprietors to file annually instead of quarterly.2
  • A Sole Proprietorship is subject to very little in the way of government regulations.
  • Company profits go directly to the business owner.

Disadvantages of a Sole Proprietorship:

  • Raising capital is more difficult, since you cannot sell shares of the company, and a Sole Proprietorship has a smaller degree of perceived “legitimacy” than a corporation or an LLC.
  • It is more difficult to secure bank financing.
  • Hiring of employees can be more of a problem.
  • You can be subject to both the Federal Tax Rate and a “self-employment tax,” effectively being subject to double taxation.
  • The “biggie:” UNLIMITED LIABILITY. This means that if your business is sued, your own personal assets are at risk.

Please seek further advice from your tax professional, but generally speaking, if you have no plans to grow a larger venture, then the decision to remain a sole proprietor will probably suit your business needs.

 

To Your Success,
Leon Edward
P.S.
 "The main difference between internet entrepreneurs and work from home small business owners who succeed online and those that do not is having the correct information,awareness of powerful web business-building resources and most importantly taking action on this knowledge. " - International Association of Home Business Entrepreneurs

Leon Edward is the blog owner and webmaster of  http://www.HomeBusinessIT.com where you'll find internet business ideas and Successful Internet Business Models info and internet made millionaires step by step blueprint plans , legitimate  internet home business reviewed , home business management and marketing information where you can even get step by step  affiliate marketing training to start your own affiliate marketing online business

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