Key Facts You Need to Know About a Sole Proprietorship
A sole proprietorship is one of the three primary entities for forming a business. The others are a partnership and a corporation. Besides the fact that a sole proprietorship is distinguished by being owned and run by one natural person, there is also no legal separation between the owner and the business. The owner bears direct responsibility for all elements of the business and is fully accountable for all of the finances of the business, including debts, loans, losses, etc.
What You Need to Know
It is important to also note that a sole proprietorship is taxed as the owner him or herself. As a business grows, it is also possible that the structure of a business can be changed to include a partner(s), forming a partnership, or others, enabling a corporation.
Despite the fact that the owner might carry a business name other than his own, he receives all profits and has total liability for all losses and debts. Another important exception to the sole proprietorship rule is that the IRS allows the spouse of a sole proprietor to work in the business without being considered a partner. This stipulation makes it possible to retain that additional worker and maintain a sole proprietorship status.
Registration of a sole proprietorship is usually very simple involving, under normal circumstances, the selection of a name and filing a "DBA" or "doing business as" with the local authority. In some states, this would be the Secretary of State. It is also important to know that there are other business forms such as S corporations, which while it is a corporation can still be used by a sole proprietor to gain the advantage of different tax benefits.
As a sole proprietor, the owner can hire employees and even independent contractors to work for him. This is despite the fact that the owner might ask the employee or contractor to make decisions that affect the way the business is run.
The owner of a sole proprietorship holds unlimited liability for the business. As such, he carries the full responsibility for all of the debts and/or losses that are the result of business operations. In the same manner, also, the owner of a sole proprietorship is entitled to all of the profits that arise in the course of doing business. Despite this, a sole proprietorship is not considered a "legal entity" since there is no distinction between the business and the owner. The business and the owner are considered to be one and the same.
Another key benefit of a sole proprietorship is that when forming the business as well as throughout the life of that business, the owner has total rights to the conduct of the business. This means that regardless of their plans and ambitions, he or she does not have to concern themselves with the intents of partners, a board of directors, or virtually anyone else who might have an interest in the enterprise. All of the operations of a business, as well as anything that happens as the business is maintained, is the result of the business owner's right.
The owner of a sole proprietorship has a number of options available when it comes to obtaining financing for their business. This includes loans from the U.S. Small Business Administration, which has an inherent interest in helping a small business succeed. These loans are not originated by the SBA, but it does guarantee loans to small businesses from independent lending institutions.
The SBA is also able to facilitate financing from private sources who have exhausted alternative means of financing, i.e., government grants. In these cases, however, it is important that sole proprietors understand that certain criterion be met such as specific business size, income standards, drawing employees from certain groups or demographic areas, among others. Local government bodies, as well as different economic development agencies, also make grants based on a business's ability to help stimulate their local economies.
Just as is the case with any form of business, a sole proprietorship has advantages and disadvantages. Be sure to conduct a careful analysis of your business and its needs so you can make a proper determination as to which type of entity is right for you and your business.