If you love working for yourself, want to enjoy an easier tax set-up, and exercise straightforward business banking, then a sole proprietorship is the right choice. Entrepreneurs with a vision to kickstart their business without much hassle opt for sole proprietorship, as opposed to partnering in LLCs or building corporations.
Wondering what a sole proprietorship is?
A sole proprietorship is one of the most straightforward business ownership structures due to its simplicity, nominal cost, and convenient set up. This article will help you understand the ins and outs of a sole proprietorship, from its definition, benefits and disadvantages, to the process of establishing one in 2024.
What is Sole Proprietorship?
In a sole proprietorship, an individual independently owns and runs the company. Unlike other business structures like partnerships or corporations, the business does not have a different legal identity from its owner.
In this type of business structure, you have total control over your business decisions and are also responsible for the liabilities. It is a preferred option for many owners of small businesses due to its ease and independence.
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Is a Sole Proprietorship Right for You?
Before starting a sole proprietorship, it's crucial to determine if this business structure aligns with your goals and needs. Consider the following factors:
Simplicity: A sole proprietorship requires fewer paperwork and procedures than other business structures. This can be the best option for you if you value simplicity and wish to steer clear of complex legal procedures.
Personal Liability: As a sole proprietor, remember that you are personally responsible for the debts and responsibilities of your company. This implies that your assets might be at risk if the company experiences financial difficulties.
Making Decisions: Sole proprietors can also make decisions without consulting other business owners or the board of directors. This can be helpful if you prefer environments where you have total control.
Tax Flexibility: A sole proprietorship's income is typically taxed as part of the owner's personal income, which can offer some tax benefits, especially if your business is in its early stages.
How to Start a Sole Proprietorship
If you are sure that a sole proprietorship is the right fit for you, follow these steps to start your business:
Choose a Business Name
The first step is to choose a unique and catchy name for your sole proprietorship. It may be fascinating to come up with a business name since it represents both you and the product or service that you are offering.
It is easier to form a sole proprietorship since your legal name automatically becomes your company's name. Make sure no company in your industry has registered for the name already. To make sure the name is open for registration, conduct a comprehensive web search and verify with your local company registry. You also have the choice to conduct business under a different name or do business as (DBA).
Register with Local Authorities
Registering your sole proprietorship with local authorities is legally required in many jurisdictions. This process may involve obtaining a business license or a registration certificate. Check with your city or county office to understand the specific registration process.
No more action is necessary if you operate using the business's full legal name. You may operate legally without signing up and filing taxes using your Social Security number. However many sole proprietors adopt a trade name for advertising or to keep their private and professional lives distinct. You must register a DBA name to use any name other than yours.
Set Up a Business Bank Account
As a sole proprietor, opening a business banking account is not necessarily required but can be advantageous. Open a dedicated business bank account to separate your personal and business finances. Having a business bank account makes managing your business's funds easier. Besides, keeping your company and personal accounts separate makes it easier to track business costs and file taxes.
You may generate business credit and accept credit card payments using a business account. Additionally, you could be interested in expanding your company at some point, having a business bank account might be crucial if you want to apply for a loan or establish a line of credit. It also adds a level of professionalism to your business transactions.
Consider Hiring Employees
As a sole proprietor you also have the option to hire employees. If your business starts to grow, consider hiring people who can help you manage the workload effectively.
Understand Tax Obligations
One of the most crucial aspects of running a sole proprietorship is understanding your tax obligations. You are responsible for reporting and paying taxes on your business income. Familiarize yourself with the tax laws in your area and keep accurate records of your income and expenses.
Advantages and Disadvantages of Sole Proprietorship
It's essential to weigh the pros and cons of a sole proprietorship before committing to this business structure.
Advantages of Sole Proprietorship
Ease of Setup: Starting a sole proprietorship is relatively easy and affordable. A sole proprietorship's principal benefit is how simple it is to establish and run. In fact, no form has to be submitted in order to "create" one. When you work for yourself, your business goes by the name of a sole proprietorship.
Complete Control: The business will be solely managed by the proprietor. As the proprietor, you will manage every facet of the company and have full control over business decisions without the need to consult partners or shareholders.
Tax Flexibility: A sole proprietorship's income is typically taxed as part of the owner's personal income, which can offer some tax advantages. The process of filing taxes for a sole proprietorship is fairly similar to that of doing your own personal taxes. Hence, you already submit a Form 1040 each year. However, as a sole proprietor, you (or your accountant) must submit a Schedule C that details the earnings and losses of the business.
Less Regulatory Compliance: Unlike corporations, sole proprietors face fewer legal and regulatory requirements, making it easier to manage your business.
Disadvantages of Sole Proprietorship
Unlimited Liability: The owners are personally liable for the business debts. They bear full responsibility for whatever commercial dealings they do. They will also be responsible for covering any losses out of their own estate in the event of a loss.
Limited Funding Options: Sole proprietors may find it challenging to raise capital for their business, as they cannot sell shares or take on partners.
Limited Growth Potential: Sole proprietorships may have limited growth potential compared to larger business structures like corporations.
Lack of Continuity: The business is closely tied to the owner, so if the owner passes away or decides to stop operating the business, it may cease to exist.
What it Costs to Start a Sole Proprietorship
Starting a sole proprietorship involves some costs that you need to consider before setting up your business.
Business Registration Fees
The registration fees for a sole proprietorship vary depending on your location. These fees cover the cost of registering your business with the local authorities and obtaining any necessary licenses.
Licenses and Permits
A license or permit is an official license from the government that enables a person, firm, or organization to carry out a specified activity, run a particular kind of enterprise, or utilize a specific resource.
These licenses and permissions are necessary to make sure that operations are conducted lawfully, safely, and in accordance with rules. However, they differ greatly according to the type of conduct, the setting, and the legal system.
You might want to seek professional help, such as legal or accounting services, to ensure all your business paperwork is in order. While not mandatory, their expertise can save you time and potential legal issues in the future. Therefore, some professional fees might be required to avail of these services.
How Skuad Can Help
A sole proprietorship in 2024 can be an excellent choice for aspiring entrepreneurs looking for simplicity and complete control over their businesses. However, it has its limitations, especially when working with global and remote teams.
With Skuad as your Employer of Record (EOR) platform, we take care of everything, from onboarding new hires globally to managing multi-country payroll, without the need to set up a sole proprietorship or a local legal entity in another country – all while you stay 100% compliant to local employment laws. Book a demo and get started today!
1. How to pay taxes as a sole proprietor?
As a sole proprietor, you report business income and expenses on your personal tax return (Form 1040) and pay taxes on the net profit through self-employment taxes.
2. What is the difference between an owner and a sole proprietor?
An owner is a general term that can refer to anyone who has ownership in a business, while a sole proprietor is a specific legal structure where a single individual owns and operates the business.
3. What is the difference between a sole proprietor and a self-employed individual?
A sole proprietor is a specific legal structure where an individual owns and operates the business alone. A self-employed individual is a broader term encompassing anyone who works for themselves and can include sole proprietors as well as freelancers, independent contractors, and other business owners.