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Sole proprietorships are the most common business structure in the United States. Often sole proprietorships are created without a deliberate intention to start a formal company. Legally, however, once your enterprise starts making money, you become a sole proprietorship unless you choose to file as a corporation, partnership or LLC.
A sole proprietorship has only one owner who is personally liable for the debts and obligations of the business. The owner manages the business and contributes any capital needed. Profits and losses are passed through to the owner. Paperwork consists of a DBA (Doing Business As) filing in the name of the business and the obtaining of any business licenses required.
Even though there are some disadvantages to operating as a sole proprietor, such as risking your personal assets or facing higher taxes, the advantages are powerful and may outweigh the risks for your business. Several advantages include:
Ease of Creation
A sole proprietorship can be created instantly, easily and inexpensively. There is no state level paperwork to file in establishing a sole proprietorship. Legal costs are minimal. One of the beauties of creating a sole-proprietorship is that once you've created it you have a job. You can hire as many people as you want. You can hire who you want. Sole proprietorships represent the most robust and nimble job creation engine in our economy.
Start-up costs for a sole proprietorship can be as much or as little as you can afford given the size of your proposed enterprise. If you start small, you may be able to ramp up slowly and avoid hiring staff till you actually need them. Entrepreneurs have started multi-million dollar businesses as sole-proprietorships in a home office, basement or garage. In this high-tech, web-based information age you can literally start and operate a business with just a laptop computer and an internet connection.
The primary advantage of a sole proprietorship is the lack of red tape . The sole-proprietor doesn't have to submit state paperwork, hire attorneys or file anything. You may have to file a DBA (Doing Business As) filing with the county if you use a fictitious name and procure any business licenses that are necessary. Many cities don't even have general business license requirements for sole-proprietorships. However there are sometimes a few ongoing requirements like annual reports and owner meetings, be sure to research your local requirements.
Sole proprietors have the distinct advantage of having total control over the their business. The owner makes all the important decisions and does not have to report to a board of directors or a partner or owner group. The sole proprietor can work on his own schedule, hire whoever he or she wants, and make decisions regarding marketing, advertising, expansion, pricing and purchasing. Best of all, if you began your sole-proprietorship to create a job for yourself, you can't be fired by anyone so long as you keep your customers happy.
You can sell the business when you like, transfer ownership to whomever you like and move the business anywhere you like. You can take the entire profit from the business, or invest it back into the business as you wish. Often the fact that the profits go entirely to the owner provides a high level of motivation and boosts the confidence of sole proprietors to add that extra level of effort to carry on the business.
Sole-proprietors file only their personal tax filings to the IRS. There is no separate tax filing for the business, no double taxation, Income and losses are reported only on the owner's personal 1040 and required worksheets. Taxes are paid at the individual level. You can deduct any business expenses up to the total you income you receive from all your income sources including interest, dividends and sale of nonbusiness property. Your ability to deduct business expense from your family's total income tax can be helpful during startup, a downturn phase or expansion phase of your business.
A major advantage of a sole proprietorship, particularly if your business is based on proprietary processes, patents or procedures is that there are no owners to leak your company's business secrets to competitors. Sole proprietors can keep the secret of their business success as close to the vest as they wish.