Due to the lack of government rules, a sole proprietorship is the easiest type of business to start and end. It is often used as a business structure because it is easy to start, has low costs, and doesn’t need much maintenance. As a result, independent contractors, and consultants prefer to run these types of businesses. However, just as there are negative and positive aspects of any business structure, most small businesses start out as sole proprietorships and either stay that way or grow to become limited liability companies or corporations. In this article, we will discuss sole proprietorship with examples, how you can start one, sole proprietorship vs. an LLC, its characteristics, and the advantages of being a sole proprietor.
Sole Proprietorship
A sole proprietorship is a business owned and run by one person with no legal distinction between the owner and the business entity. It is a small business that is owned and run by one person. Besides, it is the easiest type of business structure because the business and the owner are not legally separate. It is also called sole proprietorship, individual entrepreneurship, or just “proprietorship.”
A sole proprietorship starts when you start doing business on your own. It doesn’t require filing federal or state forms and has few regulations, making it a great way for self-employed people to start out. The owner of a sole proprietorship is entitled to all profits but is also responsible for all debts, losses, and obligations.
Examples of a Sole Proprietorship
In a sole proprietorship, all of the business’s responsibilities and financial obligations are taken care of by the owner. People who choose a sole proprietorship frequently work in low-risk areas and like how simple and flexible the business runs. This is a list of businesses that work well as examples of sole proprietorships.
#1. Freelance Writer
A freelance writer writes content for clients that can be published in print or online. This business is a good example of a sole proprietorship because it is flexible and has a low liability risk. Many writers work part-time as freelancers, so it makes sense for them to be the sole owners of their own businesses.
#2. Plumber
Some construction companies and city or county departments hire plumbers to take care of homes, businesses, and industrial buildings. On the other hand, many are self-employed and work as independent contractors for construction companies or provide services to the public. A sole proprietorship is a good way to start a plumbing business because it lets the owner build a brand without having to spend time and money registering for a formal business structure.
#3. Freelance Photographer
Freelance photographers can work in a studio or in their own homes and still offer on-site photo shoots for weddings and other special events. For example, many freelance photographers start out with just a camera, a laptop or computer, and a car to get to places where they need to take pictures. When a small business owner is a sole proprietor, they can apply for a “doing business as” (DBA) name and claim business expenses.
#4. Housekeepers
If someone owns a housekeeping service, a sole proprietorship may be the best choice. These kinds of businesses usually get too big for one person to run, so, as we said about landscaping, the owner may want to switch to a different business model that works better for operations and taxes.
#5. Bakery Owner
If you own a bakery with only one location, your business is a good example of a sole proprietorship because it is stable and you are unlikely to be sued. You’ll have insurance to cover mistakes, like food poisoning or falls in your bakery. A DBA (doing business as) must be filed with the appropriate state or local agency if the bakery is to be run under a name other than the owner’s given name.
#6. Tutor
An academic tutor usually takes on as many clients as they can. They often go to the clients’ homes or meet them in libraries. This works great for a one-person business and is the same as the freelance example above. As a tutor, you have little to no liability, especially if you offer your services in a public place.
How to Start a Sole Proprietorship
#1. Decide on a Business Name
To start, you need to decide on a business name. It can be exciting to come up with a name for your business because it shows who you are and what you are selling. People will think of you when they hear this name, so it’s important that it gives a good impression of your business.
When you start a sole proprietorship, your legal name is also the name of your business, which makes things easier. meanwhile, You also have the option to create a different business name, also known as “doing business as” (DBA)
#2. Register Your Company’s Name.
When it comes to choosing a business name, sole proprietors have two possibilities. Your business name can be the same as your personal name, or you can file your business under a different name. If you do not wish to use your personal name for your business, you must use a fictitious business name or a “doing business as” name (DBA). DBAs aren’t necessary for most states, but they come in handy when you create a business banking account or a company credit card because these institutions want you to separate your business and personal finances.
DBA requirements and registration processes vary by state, county, and municipality. More information about registering your business can be found at local government offices and websites.
#3. Purchase a Website Domain Name
Buying a domain name for your website is another way to start a sole proprietorship. Once you’ve decided on a business name and registered it with your state, it’s time to buy your website’s domain name. Your domain name is how people find your site. For instance, something like this: www.example.com. Also, to avoid confusion, it’s best to make your domain name the same as the name of your business. If the domain name you want isn’t available, think of something similar to your business name that could work instead. It’s okay if you’re not ready to start building your website yet. You can still reserve your domain to make sure that it doesn’t get taken by another business.
#4. Obtain Business License and Permits
Certain jobs and industries have different licensing requirements in each state. Some businesses need licenses or permits from the government. Depending on the type of business you want to start, you may need to register for an operating license or permit to operate. Depending on the kind of business, you may need more than one license or permit to run it. Also, you can find out about license requirements on your state’s website or by calling the administrative offices in your city and county.
Finally, you’ll probably need a seller’s permit if you sell goods that are subject to sales tax. The state gives you this permit, which lets you collect sales tax, which you then send back to the state.
#5. File for an Employer Identification Number (EIN)
Most of the time, your social security number will also be your tax ID. If you decide to hire employees or create a retirement plan, however, you’ll need an employer identification number (EIN) to start. When you file your taxes with the Internal Revenue Service (IRS), you need to give them your EIN. You can get your EIN easily and for free from the Small Business Administration’s website.
#6. Open a Business Bank Account
If you are a sole proprietor, opening a business bank account can be very helpful. Having a bank account for your business helps you keep track of its money. If you keep your business accounts separate from your personal accounts, it will be much easier to find business expenses and figure out how much tax you owe.
#7. Get Business Insurance
Becoming a sole proprietor has some benefits, but it also has some disadvantages. As a sole proprietor, your business debts are also your own personal debts. Small business insurance might be a good idea. Also, without insurance, you have to pay for any costs that come out of your own pocket. General liability can help pay for the costs of damage to property, injuries to people, and lawsuits. This can help keep you from having to pay for any accidents or unplanned events. up a credit line.
What Are Characteristics of a Sole Proprietor
It is required that a sole proprietor have certain characteristics to help own and operate the business successfully. Therefore, a sole proprietor should have the following characteristics:
- Having that understanding that there is no need for any kind of formality to be made: The sole proprietor does not require any law to meet any requirements. Unless a license is required by law, a sole proprietor may participate in any business.
- He gets both the profits and the losses: The individual operates solely for his or her own benefit. He invests his own money and runs the entire company. He carries all of the risks and controls all of the gains. This is one of the main characteristics that help a sole proprietor maintain self-control in business.
- The sole proprietor is responsible for all debts and obligations, no matter how big or small.
- Most time, Depending on the type of business or activity, the local authority may require a business license or certificate to operate or to use a fictitious name.
- Most of the time, a Sole Proprietor’s liability is limited by buying liability insurance.
Sole Proprietorship vs LLC
An LLC, which stands for “limited liability company,” is a business structure that has features of both a corporation and a “sole proprietorship.” There are many different kinds of LLCs, and each has its own rules. A single-member limited liability company, which we’ll compare in this post, is most similar to a sole proprietorship. A single-member LLC has only one owner, who is in charge of everything.
#1. Taxes
Overall, a limited liability company(LLC) protects its owners from personal liability more than a sole proprietorship. This is one of the biggest benefits of this type of business.
In an LLC, the owner’s personal liability is limited to the amount of money they’ve put into the business. So, if the LLC has debts, the owner is not personally responsible for paying them off if the business can’t do it on its own. But you have to make sure that your business and personal life are totally different. Again, the best thing to do is to talk to a tax expert.
#2. Liability
One of the main reasons why a limited liability company is better than a sole proprietorship is that it protects the owner from personal liability. LLC owners are only accountable for their investment. If the LLC cannot pay its bills, the owner is not personally liable. However, you must keep work and personal matters apart. Again, always consult a tax professional. Hence, if your sole proprietorship goes bankrupt, you risk losing everything; that is why it is very important to think about the risk involve before making big investments in your business.
#3. Costs
Since there is no formal process or paperwork, setting up a sole proprietorship can be cheaper than setting up an LLC. Even though it’s not required, some sole proprietors may choose to register a DBA name. The costs of registering a DBA depend on where you live. Owners of both sole proprietorships and LLCs need to look into local business rules and get any licenses or permissions they need. Also, the cost of setting up an LLC depends on where the business is located. This is because state requirements vary, so it is important to do research and follow state rules. However, always file a separate entity name with the secretary of state. The US Small Business Administration estimates that this registration process costs less than $300, depending on location and business type.
#4. Funding
LLCs tend to find it easier to get money from outside sources than sole proprietorships because people think of an LLC as a safer investment than a sole proprietorship. It is a separate business entity. These things are true for both business loans and business lines of credit, as well as for investors.
LLCs protect investors’ personal assets, so they’re more willing to invest in them. Also, banks offer fewer funding options for sole proprietorships, including personal loans rather than business loans. An LLC can also take on more investors, while a sole proprietorship can only be owned and run by one person.
#5. Management and Control
The sole proprietor is responsible for all business operations and management. They control everything. But it can also hinder growth and be a burden to bear alone.
While LLC management and control are more flexible, Single-member LLCs can act as sole proprietorships and add members or workers. Even though the owner still has control, they have to figure out how to meet everyone’s needs and wants.
Advantages of a Sole Proprietorship
Most small businesses in the United States register as sole proprietorships because it’s simple, quick, and easy. The majority of small businesses don’t have to worry about the requirements that other business entity types entail. Meanwhile, there are other advantages to consider when choosing to run your company as a sole proprietorship business.
Let’s look at the main advantages of a sole proprietorship:
- You’re the boss.
- You get to keep all of the profits you make.
- The costs of starting up are low.
- You have a significant amount of privacy.
- It’s easy to set up and run your business, and if your circumstances change, it’s easy to shut it down.
What Are the Challenges of Sole Proprietorship?
The lack of liability protection is the sole proprietorship’s biggest drawback. Since there is no concept of a legal entity in business, every liability is a personal liability.
What Is a Sole Proprietorship vs LLC?
An LLC exists independently of its members, who are its shareholders. Members are not personally liable for the obligations and liabilities of the company, nevertheless. The LLC is in charge here. A sole proprietorship is a single-person-owned, unincorporated company.
Why Sole Proprietors Are Successful?
For a startup business owner who is still unsure of his company’s potential, low start-up costs and straightforward taxation are important benefits. The sole proprietorship is a very effective business structure for start-ups because of these advantages.
What Are the Challenges of Sole Proprietorship?
The single proprietorship’s biggest drawback is its lack of liability protection. Due to the lack of the concept of a legal entity, every business liability is a personal liability. Consequently, the owners are fully responsible for the firm even though they have the opportunity to oversee and decide independently.
Can a Sole Proprietor Pay Himself a Salary?
The short answer is no, sole owners are not the sole proprietorship’s employees; they are self-employed. They cannot obtain a Form W-2 from the sole proprietorship, pay themselves a salary, or have an income tax, social security tax, or Medicare tax withheld from their compensation and that’s one of the major advantages too.
Can Sole Proprietors Have Employees?
A sole proprietorship is able to employ people as numerous advantages are connected with the development of jobs, such as tax breaks, which may result from this. Additionally, spouses of business owners may work without officially declaring themselves as employees.
Do I Need a Business Account if I Am a Sole Proprietor?
You are not needed by law to open a business checking account if you are a sole proprietor. This is not to say that sole proprietors should open a personal checking account.
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