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Sole Proprietor vs. Independent Contractor: What's the Difference?

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Sole Proprietor vs. Independent Contractor: What's the Difference?

Who is a sole proprietor?

A sole proprietor is someone who is in business for themselves and is not an incorporated business. “Sole” means single, or one person, and “proprietor” is another word for owner. It may differ in other countries, but in the United States, this is the default business type and requires fewer formalities than other business types, such as single-member limited liability companies (LLCs), multi-member LLCs, partnerships, S corporations, C corporations, and benefit corporations (B corps). In general, there is no legal separation between the individual and the company.

How is sole proprietorship different from other business models?

One of the ways sole proprietorship is different from other business models is that they do not produce a separate business entity. What this means is that the sole proprietor's business liabilities and assets are essentially the same with their personal assets and liabilities.

Advantages of being a sole proprietor

The advantages of sole proprietorship include,

Total control of the business

The "sole" in Sole proprietorship means that the sole proprietors manage their business alone and are in total control of making business decisions.

Simple tax management

Because the sole proprietor does not produce a separate entity from their personal assets and liabilities, managing and filing taxes becomes easy.

Easy to launch business

A sole proprietorship business does not require extensive paperwork and business can commence right after registering the business.

Less expensive than other business models

A significant benefit of being a sole proprietor is that it is free and affordable to register. The primary expense is registering sales and service tax. All other business types must pay yearly fees. Also, there is the risk involved with liability protection.

Disadvantages of being a sole proprietor

The disadvantages of being a sole proprietor include,

Difficulty in raising capital

Because the sole proprietorship is a one-man business, it might be quite difficult to raise funds to kickstart the business. Unlike other business types, the sole proprietorship may face harder resistance obtaining bank loans to launch business.

Bears the burden of loss

The sole proprietor singlehandedly bears the loss or debt incurred in running the business. They are responsible for every penalties, liabilities and losses.

To know more about the pros and cons of being a sole proprietor, read more here.

Who is an independent contractor?

Independent contractors are defined as self-employed individuals who are contracted by an entity, such as a business or other client, to offer their labor and services, and who are not employed by the client company or customer. These individuals may be sole proprietors, as owners of their own service business, or they may be a part of a partnership or limited liability company. The entity paying the independent contractor does not pay the contractor benefits. Independent contractors are responsible for paying their own taxes, including contributions that would normally be at least partially contributed by an employer, such as both the employee and employer shares of social security contributions.

Advantages of being a contractor

The advantages of being a contractor include

Flexibility with work

Contractors make their own schedule. Independent contractors decide when, where, and how the job will be done.

Lower taxes

Contractors pay lower taxes in comparison with people working for an organization.

Avenues to make more money

Because contractors can offer their services to several organizations, they have an opportunity to earn more money than employees in organizations.

Disadvantages of being a contractor

The disadvantages of being a contractor include

No guaranteed client

One of the major tasks of contractors is actively seeking for clients. Unlike full-time employees, there is no guaranteed clientele for their business

No benefit provision

Employees in organizations are entitled to statutory and supplementary benefits from their organization. These benefits such as health insurance, pension, allowances, leaves and many more makes life easier for full-time employees.

Read more on the advantages and disadvantages of contractors from our Skuad spot.

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Difference between sole proprietor and independent contractor

The difference between a Sole proprietor and an Independent contractor can be highlighted in their service provisions, income generation pattern and taxation. The table below gives more details.

Sole proprietorship Contractors
Service provision Sole proprietors provide services for products that are usually not based on any written contract. Sole proprietors are usually traders selling goods and services in a particular market. Independent contractors provide services to clients who sign a contractual agreement with them.
Income generation Sole proprietors generate income by selling their products. While they may also do some contractual work, their primary income comes from product sales. Also, they are obligated to track their income and expenditures throughout the year. Independent contractors provide specific services to organizations based on agreed contract terms. They also receive a 1099 form from organizations that pay over 600 USD.
Taxes Organizations whose service cost exceeds 600 USD at the end of the tax year must fill out Form 1099. The independent contractors return and submit the forms to the IRS before the beginning of the next tax year. Taxation for sole proprietors is more straightforward than for independent contractors. They obtain Form 1040 to report their annual income tax returns.

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Skuad is a global employment and payroll platform that enables organizations to hire full-time employees and contractors in over 160 countries without setting up subsidiaries or legal entities. Skuad’s platform also helps organizations onboard talent, manage payroll, and ensure compliance with country-specific employment laws and tax regulations. 

In addition, we handle your entire employment lifecycle so that you can scale your business operations compliantly, with reduced efforts and a top-notch HR administration.

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FAQs

Is a sole proprietorship the same as a freelancer?

A sole proprietorship is the default business entity for freelancers. This means that if you start working as a freelancer without forming an LLC or corporation you'll automatically operate as a sole proprietor.

How do I know if I'm a sole proprietor?

A sole proprietor is someone who owns an unincorporated business by themselves. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

What are the 4 advantages of a sole proprietorship?

  • You get to keep all the profits.
  • The start-up costs are low.
  • You have maximum privacy.
  • Establishing and operating your business is simple.

What are the risks of a sole proprietorship?

The most trivial risk of a sole proprietor is unlimited personal liability for the business's debts. This means that if your business is unable to pay its debts, in such cases, your house, assets, and bank accounts are in jeopardy.

What is the difference between a proprietor and a contractor?

The prominent difference between a sole proprietor and an independent contractor is the way their compensation is reported. A sole proprietor must track their business expenses, while an independent contractor will receive a 1099 form that outlines the income earned during the previous calendar year.

About the author

Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.

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