By Rieva Lesonsky
This is part one of a four-part series on business formation for small business and ebusiness.
According to the latest Census figures, there are close to 23 million sole proprietorships in the United States, making sole proprietorship the nation’s most popular form of business ownership. In today’s litigious society, why would a business owner still choose to form a sole proprietorship when it puts everything you own, both professionally and personally, at risk? Here’s a closer look at how sole proprietorship works.
Sole proprietorships are the simplest form of business ownership. In this business structure an individual owns and manages the business and is responsible for all business transactions. Independent contractors, freelancers and independent sales representatives often set up their businesses as sole proprietorships and are personally responsible for all debts and liabilities incurred by the business. People like the sole proprietorship structure because it’s is the easiest to form, has the least amount of paperwork, and the simplest tax requirements.
The advantages to being a sole proprietor include:
- You have complete control and decision-making power, without having to worry about answering to shareholders or a board of directors.
- Although your business still needs to comply with all laws and licensing permits, as well as local regulations and zoning ordinances, overall there’s far less paperwork and red tape than there is in a corporation.
- A sole proprietorship can easily be passed down to the business owner’s heirs.
- Unlike a corporation, which involves both incorporation fees and annual fees, the only fees involved with a sole proprietorship are paying for a business license and filing a fictitious business name (if you choose to do so).
- The IRS does not require any specific business taxes be paid by a sole proprietorship. Taxes are paid on the income made from the business and filed with the owner’s personal income taxes.
The downside to a sole proprietorship, however, is significant. Because there is no separation between the individual and the business, in case of a lawsuit or business debt, all of the sole proprietor’s personal assets can be at risk. This is why many business owners choose to protect themselves by selecting a different form of business, such as partnership, LLC, or corporation.