Categories
Blog

What’s a SOLE PROPRIETORSHIP

In today’s society, it appears that many people are looking for ways to earn or increase their income. This is the reason small businesses spring up practically everywhere.  If you are considering becoming your own boss then don’t hesitate and don’t put your dreams and expectations on hold. It is easier than you may imagine.  A sole proprietorship is the ideal solution for starters.

What is sole proprietorship?

The term itself defines the business type, “sole” meaning single and “proprietorship” owning.  In other words, it is an individual entrepreneurship, a business owned and run by an individual, a private owned unregistered business.

How to start a sole proprietorship?

Well, first decide what exactly you want to do. Take into serious consideration your qualifications, talents and skills. Many sole proprietors started off using their hobby, what they enjoyed most to bring in some extra cash and eventually evolved into a flourishing business.  Consider some of the following fields which are among the most popular sole proprietorships:

  • Freelance Writers/designers
  • Instructors/ Tutors
  • Landscapers
  • Virtual Assistants
  • Caterers
  • Accountants/Bookkeepers
  • IT /Computer Specialist
  • Household Assistants
  • Local shop

Having decided what products or services your business will provide, make a business plan. Will you work from the comfort of your home or set up a shop?  Why should potential clients pick you, your products and services instead of your competitors’?  How much money are you willing to invest initially? Don’t let enthusiasm take you over board!  A sole proprietorship is the answer to launch a small scale business at first.

However, nothing comes easy. There are pros and cons involved. Firstly, let’s have a look at some advantages of sole proprietorship.

Advantages of sole proprietorship

Easy formation

Without doubt, it is the easiest and often most cost-effective way to start and run your business.  In U.S. more than 70% of businesses are owned and run by sole proprietors.

No legal formalities

You are not required to register or incorporate your business with the state, skip all the paper work and fees involved in corporations or LLCs. But you need a business permit and license to comply with federal and state laws.  You don’t have to keep piles of documents regarding your business legal status.  This is why it is so popular among freelancers and new upcoming entrepreneurs.

Work independently

As a sole proprietor you have absolute control over decisions and priorities. No need to consult anyone. You can adjust your schedule, your targets, even your load of work as you render necessary.

Enjoy Benefits

A sole proprietor is entitled to all the profits and has full control of revenue.  Therefore, being the business owner yourself, you are motivated to put more effort and work harder. Furthermore, there is less paper work involved as you do not need to keep meeting minutes, bylaws, resolutions, balance sheets for IRS and all the business information remains confidential.

Taxation

Filing taxes is a simple task for sole proprietors. A sole proprietorship is considered a pass-through entity for tax purposes. This gives you the privilege to deduct 20%of your business’s net income from your taxes.  Business profits and losses are reported on your personal tax return. You don’t have to make complicated calculations for different ownerships and shares. But if you opt to work from your home you are entitled to deduct home and car business expenses.  Best of all, you receive the after-tax profits.

However, as already mentioned, there are some drawbacks to be considered. According to statistics a very small percentage of approximately 4% receives financial support.  As there is little distinction between a sole proprietor and the business financially and legally speaking, a sole proprietor is exposed to a number of risks.

Here are the main drawbacks of a sole proprietorship:

Bank Loans

As a sole proprietor you have limited finance available for investment like your personal savings. Eventually, you may want to expand your business, increase your revenue. You will find yourself in a challenging situation as banks and lending institutions hesitate to give loans to sole proprietorships. According to statistics a very small percentage of approximately 4% may receive financial support,   contrary to registered business as they are assumed to have higher rate of success and survive longer thus capable of repaying their loans.

Lawsuits

Sole proprietors are personally liable for their business’s debts and obligations.  In other words, creditors and legal procedures can claim your personal assets in order to get their money A strong lawsuit can prove detrimental to a sole proprietorship. Whether it is a creditor or a claim for medical expenses due to an injury, the claimant can go after your assets, your home, your car your credit history and savings are unprotected.  It is advisable, before setting up your business to consult a lawyer and work along together so as to be on the safe side whenever a decision is made.

Taxation

As previously stated, sole proprietorships are pass-through entities entitled to 20% tax deduction. However, you may end up paying more taxes than corporations and LLCs because there are some limitations on the use of tax deduction.  Furthermore, in some cases you cannot claim the full 20% deduction, for example artists, actors, athletes, consultants and lawyers are not entitled to the deduction.  In addition, when your income increases the deduction decreases. In addition, a sole proprietor has to pay self-employment taxes such as Medical and Social Security tax.

Exhaustion/Burnout

Sole proprietors may work even more than 50 hours a week because they have many roles to play. They have to be on top of everything that happens in and around their business, marketing, financing, advertising just to mention a few.  One of course can hire employees or independent contractors to help, but in reality most sole proprietorships are on their own.  As when help is needed most, it is not easy to find reliable assistants on-the-spot.  They must manage marketing, advertising, finances, strategy and leadership – and everything else that comes along the way.  Sometimes having too much to accomplish in very little time can lead to exhaustion which takes its toll on the business itself, resulting in expensive mistakes.

Unforeseen events

Another problem regarding sole proprietorships is that the business may outlive the owner.  Sole proprietorships accumulate an enormous value and customer loyalty due to the owner. At first that is great, but it can cause serious damage to the business prospects in case the owner passes away, undergoes a disability or retires.  So, you should consider setting up a corporation or LLC if you want your business to outlast you.

Being familiar with most of the pros and cons of a sole proprietorship, sole proprietors can distant themselves from the business by following some simple steps.

Maintaining a safe balance is worth the effort

Business Account

Open a business account to be used only for business purposes, deposits and withdrawals. This enables you to monitor the cash flow, losses for tax returns and bookkeeping purposes. Ask for a business bank account that requires low minimum balance and allows you to perform transactions without a monthly charge.

Business Credit Card

A credit card is a good solution if used solely for business expenses, never for your personal ones. It also offers the advantage of different credit limits, rewards points upon purchases, it may offer a 0% introductory interest rate. You can even use it to borrow money, interest free while the free interest rate is in effect.

Employment Identification Number (EIN)

Although you do not need EIN as a sole proprietor unless you have employees, getting one is useful. It builds your business credit and enhances your loan application when needed.

DBA

As a sole proprietor your personal name is the legal name of your business. But you can use a fictitious, “doing business as” (DBA) name.  It can be used for your business bank account and credit card. Have it registered as soon as you pick one, so no one else can use the same name. This name can also be used when you get a domain and eventually build your website.

Business Insurance

Do not save money on insurance costs. Make sure you are fully covered. Get a general liability insurance, a product insurance even home-based business insurance to cover all possible damages on the premises, equipment, products and even injuries on the job.

Contracts

Disputes are unavoidable. Lawsuits can be disruptive especially for sole proprietors whose personal assets are at risk. Draw clear contracts every time you do business with others, suppliers, vendors or when you hire employees.  You can have a lawyer draw the contracts and agreements for you to avoid any pitfalls.

You may have started off a sole proprietorship but your business structure can be changed at any time in the future to accommodate your needs. You can upgrade it to a corporation or LLC to achieve much more like revenue increase, work with major clients and hire more employees.  Eventually you can build a lifelong business to pass on to future generations.

Leave a Reply

Your email address will not be published. Required fields are marked *