Choosing the Right Business Entity - Sole Proprietorship
In this blog, we discuss the following:
Advantages of Sole Proprietorship
Disadvantages to Sole Proprietorship
How to Establish a Sole Proprietorship
A business structure is similar in the sense that it reminds us of choosing which university to attend as we were preparing to leave the last year of high school. You either know which university to attend, you’re unsure where to start, or considering a few options based on your needs and wants.
Choosing where to start your next new journey is the same as finding the right business structure, as it is one of the first steps to starting a business. It can sound daunting but, it doesn’t have to be a tough decision once you understand the differences and what you’re looking for. Luckily, unlike universities, there are just a few to pick from. There are four main business entity choices: sole proprietorship, partnership, limited liability company (LLC), and corporation. In this blog series, we go over the advantages and disadvantages of each, starting off with sole proprietorship.
Advantages of Sole Proprietorship
A sole proprietorship refers to any business with a single owner.
For most entrepreneurs, the easiest and usually most recommended form, to begin with, is that of a sole proprietorship. This business structure is a low-risk business or an owner looking to test a concept.
A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. Unlike corporations, the entities do not need to invest time and resources in various government demands such as audits or financial information reporting to the public.
Another plus to being a sole proprietorship is that you only get taxed once. The sole proprietorship pays only the income tax on the profits earned by the business.
Disadvantages to Sole Proprietorship
Because the entity itself does not have to pay income tax, it also comes with the downside of the business owner having to face unlimited personal liability for all debts incurred by the business
With that said, it also limits capital raising and obtaining new funds such as (compared to partnerships and corporations)
Not long term (not a huge disadvantage but), you will have to eventually switch once business picks up and you are hiring more and expanding your business.
How to Establish a Business as a Sole Proprietorship
Again, as mentioned above, a sole proprietorship is the easiest to set up since you can start operating once the business is formed. Here are a few steps on how you can start:
Choose a business name
Register your business name
Purchase a website domain name
Obtain a business license (and other permits)
File for an employer identification number (EIN)
Open a business bank account
Get insurance coverage
For most small businesses, every penny counts. So, depending on who you go talk to, the recommendations can vary. A tax consultant might advise you based on your tax situation. A bookkeeper will have a different viewpoint for ease of data entry. Talk to a lawyer and you’ll get suggestions from the asset and liability protection side of things. You can talk to a financing expert and they can give you the best opportunities for obtaining credit and capital. Talk to investors and they’ll have a specific type of entity they will only invest in. A branding expert can give the best entity just based on the image and marketability of your company. No two businesses are the same. So make sure to talk to a professional to make the best decision for you and your business. Determine if a sole proprietorship is right for you. You can contact us today for a consultation.