Many decisions must be made when starting a business. The most crucial decision is which type of business structure you choose. Many structures in the United States can be complex and have tax implications. However, the most common structure is the sole proprietorship.
Solo proprietorships are the simplest business structure and require very little paperwork. You may not realize that you are a sole proprietorship.
Other considerations could mean sole proprietorships may not be right for your business. It is therefore important to fully understand how these businesses operate.
What is a sole proprietorship, and what does it mean?
Sole proprietorship refers to an unincorporated business structure owned and managed by one person. The business and its owner are considered one entity in all matters pertaining to government regulations, such as taxes and liabilities.
This means that, if the company is sued or owes money to a creditor, then the owner of the company is responsible for all business debts and obligations. There is no additional protection.
The sole proprietorship owner is responsible for all tax liabilities associated with the business. The owner’s personal tax returns include all profits, losses, and other taxable items arising from the business.
This can make the process easier, but it will also mean that other companies won’t have certain protections. To pay the company’s debts, personal assets can be taken.
Props only vs. other structures
A business can choose between four types of business structures in the United States. Each structure has its own characteristics and is suitable for different situations.
Limited Liability Company
Limited liability corporations, or LLCs, are the most popular business structure. LLCs have some advantages over partnerships and corporations, but they also allow for flexibility in business structures.
An LLC is an independent business entity that is separate from its owners. It is considered a separate entity under state law. Based on their requirements, LLC owners can decide their own management structure, operating procedures, and tax treatment. The primary difference between sole proprietorships and LLCs is their liability. As the name suggests, LLCs offer some protection from business debts and legal obligations. The business is also subject to taxes through pass-through or corporate tax status.
LLCs are more complicated to form due to the extra protections. The process is easy and applicable to all businesses.
A sole proprietorship is a business with a single owner legally separate from the business. Partnerships work in the same way as sole proprietorships, but they will have multiple small business owners. Although these structures are simple to set up, there can be other benefits and complications when multiple business owners are involved in the decision-making process.
Although a partnership agreement is not required to be in place before forming a company, it can be very beneficial. It can not only define the rights and responsibilities of the partners but also help distribute tax and legal liability associated with partnerships.
A corporation is an independent legal entity that is created under state law to allow business operations that offer the best protection and meet the most stringent requirements. This can also include non-profit corporations, but business corporations are most relevant.
A corporation is created. This creates a legal entity that is completely independent of the owners. The corporation will continue to exist regardless of what happens with shareholders and individuals. These entities are complex to form and require multiple names beyond the owners. Directors and officers are also needed. They must meet each year and submit reports to the government.
The tax system is more complicated because each corporation has its own tax structure. Multiple types of corporations like an S Corp or a C Corp can be used to determine the exact tax method, but they won’t be applied to individual owners’ taxes.
Who can be a sole proprietor?
There are several elements to consider when determining a business structure, such as ownership and protection.
A sole proprietorship means that there is only one owner and not several. This arrangement is not suitable for all people. Instead, you should consider forming a partnership. A sole proprietorship is a good option if you’re looking to start your own business.
Some states allow spouses to co-own a sole proprietorship, provided they pay their taxes together. However, this is not always possible in all states. You can also opt to pay estimated taxes quarterly.
Because of the effort required, many people prefer a sole proprietorship. For sole proprietorships, most states don’t require formal filing.
Technically, you are a sole proprietorship if you own a business. There is little to no waiting time and very little cost. Sole proprietorships are a great option to start a business quickly.
When deciding whether a sole proprietorship is right, the most important consideration is how much protection you need.
Some types of business may expose you to greater levels of liability. An LLC may make sense for some, but an LLC may not make sense for others.
A tax attorney can help you determine whether a sole proprietorship is the best choice for your tax situation.
The advantages of being a sole proprietorship
A sole proprietorship is preferred by many people because they have complete control over their business. No other owners, legal partners, shareholders, or shareholders are required to approve any decisions, large or small. This freedom is why many people set up their own businesses. Being able to adapt as your business grows can be a major advantage.
Sole proprietorships can be formed quickly and without any hassle. This eliminates the need for long wait times or large fees. Many people operate sole proprietorships without even realizing it. You can start a business quickly and inexpensively without making a large investment.
The ability for growth and transformation
Even if you start a business, you can still use the sole proprietorship structure. Businesses often start out as sole proprietorships to gain a better understanding of the business and to find success. Later, they can convert to an LLC or corporation.
Advantages of a sole proprietorship
A sole proprietorship has the disadvantage of not being able to distinguish between the owner and the business. As the owner, you will be responsible for any legal, financial, and tax obligations.
There are fewer options to sell your business
A sole proprietorship is a way to sell your business if it becomes profitable enough. You would be subject to capital gains taxes and the buyer would have to take responsibility for any business debts.
Getting funding is difficult
Although many business loans, grants, and lines of credit are available for new business owners, they are not often given to sole proprietorships. More funding is available for corporations and LLCs. It can be difficult to raise capital if you don’t have a formal business structure.
Starting a sole prop
1. Name your business
The sole proprietorship is legal the same entity that its owner. Therefore, the business name is the same as yours.
While this can be an option for some types of business, most people prefer to use a different name. You must file through your state to use a name other than your own. This is doing business under a fictitious, trade or assumed name.
Although the process for using a trademark can vary from one state to the next, it is usually done through the state. This ensures that you aren’t using any business name already owned by another state. It is possible that you will need to pay a small fee or notify local governments.
2. Formation with the state
Most states don’t require you to apply for a sole proprietorship. However, your state department can verify. Sometimes, though the state may not require you to file, a city or county might.
3. Obtaining Licenses & Permits
Every state has its own requirements regarding business licenses. Some states require a general license for business, while others don’t.
If you plan to sell, lease, or offer taxable services, then you will need a seller’s license or sales tax permit. If you live in a state with a sales tax, this permit will allow you to collect the sales tax for the state. This permit can be purchased for a small fee.
Some professions and industries will require licensure by the state, the local government or the federal government. Every state should have a website listing who is eligible for licensure. It is essential to ensure that you comply with all laws to continue working.
Local governments may have their own regulations in addition to state laws. While you may not be required to have a general license in your state, it is possible to live and work in a place that does. To ensure that you have the correct zoning clearances, it is important to check with all local authorities.
4. How to get an EIN
A sole proprietorship is subject to the same tax as an owner’s personal income taxes. Therefore, they don’t need to get an Employer Identification number. The IRS issues EINs for tax purposes. They do not apply to this situation.
An EIN is required if you intend to employ any employees. This will allow you to properly withhold federal income taxes and report wages. You may also need an EIN if your state has a similar identification system.
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: email@example.com