Whatever industry your new business is in, getting it up and running can be an exciting time, and if you’re going to be owning and operating it yourself, you’ll likely choose to make it a sole proprietorship.
However, while starting a new business may be exciting, many who have never done such a thing before, have absolutely no idea what running a sole proprietorship actually entails, and are often clueless as to the benefits and risks it presents, when compared to other business entities.
If you’re contemplating starting a sole proprietorship, here’s what you might need to know:
What is a sole proprietorship?
This type of business entity doesn’t need to be registered under a separate name, because any profits and losses it makes, or debts it incurs, flow through to the owner.
What makes a sole proprietorship different from other business entities?
There are 5 main differences; let’s take a look at them in a little more detail:
- They are easier to open – with no forms to complete and file, and no permissions required, you simply need a bank account and, in some instances, a fictitious name statement.
- Taxation is simpler – no special tax forms are required, and profits are seen as personal income that is reported using Schedule C, coupled with a personal tax return.
- It has just one owner – partnerships consist of more than one partner, and most have more than shareholder, too. Sole proprietorships have one owner, doesn’t issue any stock and doesn’t require any member shares to be divided or assignment of percentages.
- You are in complete control – as the owner of a sole proprietorship, every decision that you make about how the business is run, is made by you, and only you.
- Legal liability – this important difference means that if a customer suffers a loss as a result of negligence or fraud on the part of the business, they are able to take legal action against it. As sole proprietor, you are legally indistinguishable from the business that you run, and the same applies to the assets that can be sought in legal action.
- Continuity of business – should something happen to one of the principal owners of other business entities, such as LLCs, partnerships and corporations, decisions need to be made as to how the business can be kept running, whereas with a sole proprietorship, should something happen to the owner, the business is effectively considered to have ended.
What structure is best for your type of business, is something best decided with a little professional help. While you can seek advice from other business owners, there can be no substitute for sound and experienced advice from those who are truly in the know, such as a business entity firm.