If you’re about to start your own business, you have many different organizational options available to you. The sole proprietorship is the simplest and most straightforward one. This creates a business that is owned and operated by you, the solitary owner of the company. While you are free to take all the profits generated by a sole proprietorship, you’re also financially responsible for its liabilities, debts, and losses.
How To Create A Sole Proprietorship
Unlike most other organizational strategies, a sole proprietorship doesn’t require any legal or regulatory actions to create. As long as you’re running a business using only assets that you own, you qualify as a sole proprietor. This means that many freelancers technically qualify as sole proprietors.
Although you don’t have to file any special paperwork to create your business, you do still have a responsibility to obtain all of the permits and licenses required to operate in your field. The specific industry you work in and the local regulations of your state and city all determine what credentials will be required. You can make use of the Licensing & Permits tool to check your needs and ensure that you’re complying fully with the rules that apply to you.
If you want your business to have a separate name, this usually has to be formalized by submitting it to the relevant authorities. It’s often referred to as a fictitious name, a trade name, or a “doing business as” or DBA name. hosting information Your trade name must be unique to you alone; no two businesses can use the same name.
Tax Implications Of Sole Proprietorship
The good news is that your tax situation as a sole proprietor is relatively straightforward. The profits of your business translate directly into the personal profits you list on your Form 1040. Schedule C is the proper worksheet for sole proprietors to properly calculate income, expenses, and losses. Bear in mind that you assume full responsibility for withholding and paying all the applicable income taxes, which includes self-employment tax. Research your tax situation carefully by checking the reference materials available at IRS.gov.
Benefits Of Being A Sole Proprietor
- Simple Formation: No other business structure can beat sole proprietorship when it comes to speed, simplicity, and affordability of formation. The costs involved are trivial, and the only regulatory obligation is obtaining any necessary licenses.
- Full Control: Being a sole proprietor entitles you to make every decision about your business yourself. No consultations are required, and you can change how you do business at will.
- Simple Tax Situation: Since your business is not a separate entity, you don’t have to record, report, or pay any additional taxes. Adjusting your personal return to reflect your business is easy, and your overall tax burden is lower than it would be with other business structures.
Drawbacks Of Being A Sole Proprietor
- Full Personal Liability: You have no shield protecting your personal finances from the financial state of your business. Your own assets may be at risk in severely adverse conditions. From a legal standpoint, you’re personally responsible for any and all actions taken by you and your employees.
- Funding Difficulties: It’s not easy to raise capital when you’re a sole proprietor. Banks are leery about lending to sole proprietors due to the liability issues discussed above, and investors may not be interested in a business without stock.
- Great Responsibility: The downside to exercising complete control of your business is that you can’t avoid doing so. Your business’s success or failure is entirely up to you.