Sole Proprietorship

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Sole proprietorshipSole Proprietorship
Sole proprietorship is the most common form of business entity. It is defined as a type of business that is owned by one person and in which there is no legal distinction between that person and the business. There are a number of advantages and disadvantages to this type of business.

A Simple Business

The popularity of this form of business is primarily due to its simplicity. Partnerships and the various types of corporations require a lot more paperwork to get off the ground. Aside from deciding on and registering a name for your business in your state or locality and complying with any basic business licensing requirements in your area, the only thing you need to start a sole proprietorship is an idea and your own drive to succeed. A sole proprietorship, as the name implies, only requires one person to get off the ground, so if it’s just you at this point, then this type of business will be your best option. Technically, many states actually do allow single person corporations, but if you are just starting out, chances are you don’t want to spend limited start-up funds on attorney’s fees to learn the legal ins and outs of incorporating in your state.

You Are In Control

The next great benefit of a sole proprietorship after the simplicity is control. You have no corporate shareholders or partners to answer to. This business will be your baby. Success or failure will be up to you. If you are confident that you know what you are doing, then starting out in this business form can enable you to set up and run things exactly as you wish.

The Businesses Debts and Liabilities Are Your Debts and Liabilities

The biggest disadvantage of sole proprietorship is that part of the definition of this business form that states there is no legal distinction between you and your business. Say you have a business that involves you doing work on someones home. Perhaps you are a painter and you just had a can of paint spill on and ruin some fancy and expensive object. First, in a scenario such as this, always carry insurance no matter your business type. Additionally, if your insurance isn’t enough to fully cover the damage or if you were unwise enough not to have any, then you had better hope you are not a sole proprietor. If you are, then the owner of that house will be able to come after and sue you personally for any and all damage to their property.

It Allows You to Grow

Perhaps your business will attract investors or a partner or two down the road. Another great benefit of a sole proprietorship is that you are not locked into this form of business. You can use it to get started quickly and easily and then once you start making money and the aforementioned liability starts to become a bigger issue, you can then incorporate. At this point, you should have the money coming in to pay any legal fees to help smooth the process of incorporating.

How To Operate a Sole Proprietorship

You should not allow the simplicity of this business form to let you get lazy in running it. Just because it’s easy to start, if you plan to have this be your bread and butter some day, then take it seriously. Keep track of all accounting. One thing that will help tremendously with this is starting a separate bank account in the name of the business. You will be really glad you did this when tax time rolls around. You also need to keep on track of this throughout the year for quarterly estimated tax filings. A basic financial accounting system or piece software that enables you to track all expenses and revenues is essential for any type of business.

When Sole Proprietorship Works Best

This type of business works best in two general scenarios. It is a great way to start a business due to its simplicity. Then when you grow, as has been mentioned, you can incorporate to give yourself and your personal assets legal protection. There is also the scenario where there may be certain types of businesses that have a low liability downside in which you may be able to continue being a sole proprietor. If you are putting out a shingle as a freelance writer, for one example, clients will read your article or other work and then accept and pay for it or not and then you both move on. There doesn’t seem to be much of a scenario there where you can somehow be subject to tremendous legal liability. Another example would be an eBay seller of purses just to pick any product example. Customers will buy them from you, and if one or two are not happy, they may ask for a refund or give you a negative feedback on eBay, but it’s difficult to see how you’ll ever be liable for damages. Whichever scenario fits you, except for cases where two or more people know they are starting out together, where a partnership would be indicated, it probably will be advisable for most of us to be a sole proprietorship at some point in our businesses’ life.

 

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