What makes the sole proprietor so unique as a business type?
- It's easiest to form, with no requirement to register with a state.
- It's easiest to run, with no regulations about having a board of directors or meeting minutes or annual meetings.
- The owner is in complete control of the business, not having to answer to anyone.
- The owner gets all of the profits of the business, but of course he or she must also take all of the losses.
But what about disadvantages of the sole proprietorship?
Do the benefits of starting your business as a sole proprietorship outweigh the disadvantages? I outlined some of the unique advantages of the sole proprietor business above.
The biggest disadvantage of the sole proprietorship is that your personal legal and financial situation and the financial and legal situation are the same. That means that a business bankruptcy affects you personally. It also means that any lawsuits against the business can affect you as an individual, or your family.
Another disadvantage of this business type is that you must pay income taxes and self-employment tax(Social Security and Medicare tax) on the entire income of the business. If your business is profitable, that can be a big bill to pay.
Read more about other advantages and disadvantages of a sole proprietor business before you decide to start your business.
Saying that a sole proprietorship is "unincorporated" makes sense, but there is more to the sole proprietorship than that. A sole proprietorship is also not a partnership or a limited liability company. Comparing these forms may help lessen the confusion about the various business types.
This article compares a sole proprietorship to a partnership, LLC, and corporation, in relation to the business owner, his/her control and liability and status.
A sole proprietorship is the easiest form of business to start. All a sole proprietor business owner needs for startup is:
a website, and some customers.
You don't need to register your business with your state, but you will need to take care of some other legal matters. You'll need to
- get a business license with your locality
- apply to the state for sales tax permits,
- and get specific licenses and permits, depending on the type of business you are starting. For example, a food business will need a health permit.
Details on these steps to starting a sole proprietorship in this article.
A sole proprietorship pays income taxes by completing a Schedule C and including this income on the owner's personal tax return.
Schedule C lists all the income of your business and then all of the business expenses you can deduct. You can include home business expenses, if you operate your business from your home, and car expenses, if you drive for business purposes.
The total net income from Schedule C is then entered on Line 12 of your Form 1040, along with income from other sources.
Self-employment tax is calculated (based on the net income of your business) and added after the income tax is calculated. The income tax and self-employment tax are totaled for a total tax liability
Sole proprietorship businesses must pay taxes in the same manner as other businesses. All of these taxes must be reported and paid at specific times and amounts.
In addition to income tax your business must
The terms "sole proprietor" and "independent contractor" may be confusing, so a brief discussion of the difference might help.
A small business can be both a sole proprietor and an independent contractor.
The sole proprietor designation is for federal income tax purposes - a sole proprietor pays income taxes on Schedule C, along with the individual tax return, as detailed above.
An independent contractor works for someone else and receives a 1099-MISC form (similar to a W-2 form for employees) showing income for the year.
All about Sole Proprietors and Sole Proprietorship
All about the Sole Proprietor Business - Startup, Taxes, and More
The sole proprietorship is the most common form of business organization in the U.S.; over 23 million million people are sole proprietors, and this type of business represents 73% of all businesses in the U.S. today.
A sole proprietor business is the easiest business type to start and operate. You don't need to formally register your business with your state, like corporations or LLCs do. But there are some disadvantages to a sole proprietor business, which are discussed here, as well as information about the differences between sole proprietors and other types of businesses.
One question that's often asked is the difference between a sole proprietor and an independent contractor. A small business can be both - a sole proprietor for the purpose of paying income taxes, and an independent contractor for the purpose of getting paid by companies for work. Read more about these two terms in this article.
If you are a sole proprietor or you are considering starting a sole proprietorship, find out more about this business form,