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What is Sole Proprietorship? Explained With Examples

Sole Proprietorship

Definition: A sole proprietorship is the simple business formation in which one person owns and operates the business and is liable for all phases of the business and gets all profits.

Setting up a small business can be a risk-taking process. You have got to come up with a good business plan, solicit customers, and maintain short- and long-term finances.

If you are still looking for which business entity kind is best for you then you might be inspired by knowing the benefits of the sole proprietorship. 

What is Sole Proprietorship?

The sole proprietorship is the simple form of business under which one can run a business. The sole proprietorship is not a licensed entity. It solely indicates to a person who possesses the business and is liable for its debts.

A sole proprietorship can run under the title of its owner’s name or it can run a business under a counterfeit name, such as Nancy’s Nail Salon. The invented name is just a trading name which does not form a legal entity separate from the sole proprietor owner. 

The sole proprietorship is a famous business structure due to its simplicity, easiness of setup, and low cost. A sole proprietor only needs to register his or her name and secure local licenses, and then the sole proprietor is ready for business. 

Sole proprietorship VS LLC

A big difference between sole proprietorships and limited liability companies (LLC) is that the sole proprietor is completely in charge and responsible. 

In partnerships, there is another person sharing the duties of the business. Another big discrepancy between sole proprietorships and corporations or LLCs is that the financial liability lies with the LLC and not the individuals running the LLC. 

For example, if the LLC cannot pay its liabilities, the operators’ assets have security against debt collection for the LLC’s unpaid debts.

Advantages of Sole Proprietorships

  1. Starting a sole proprietorship is simple. Unlike other business forms, beginning a sole proprietorship demands less paperwork and time to form a legal sole proprietorship. 
  2. It is affordable to start a sole proprietorship. Where other business forms have raised fees and filings to open for business, sole proprietorships tend to be affordable models to begin and manage. 
  3. There are some tax advantages for a sole proprietorship. Rather than the business having to file its own tax return, sole proprietors demand businesses’ profits and losses on their own personal tax return. Also, the sole proprietorship is taxed using personal income tax rates instead of corporate making it easier and more affordable to comply with your tax obligations. 
  4. Sole proprietors can hire others and grow their business. Sole proprietorships can employ others and enjoy the tax advantages from doing so. Additionally, spouses of the owner can work for the sole proprietorship without being revealed as an employee. 
  5. Owners have full and direct authority overall decision making. Because the owner is the business, the owner makes all choices for the business rather than sharing control with a partner or corporate board. This provides owners the liberty to run the business in the way they want. 

Disadvantages of Sole Proprietorships

  1. Owners are completely responsible. If business debts become overwhelming, the individual owner’s finances will be affected. When a sole proprietorship is unable to pay its debts, the owner’s home, savings, and other personal assets can be used to fulfill those debts. 
  2. Self-employment taxes apply to sole proprietorships. Owners must pay self-employment taxes on business revenue. 
  3. Business action ends with the death or departure of the owner. Because the owner and the sole proprietor alone owns a business, if the owner dies or becomes disabled then the business dissolves with them and the capital and assets of the business become part of the personal estate. The assets and property are subjected to inheritance taxes and can have a big impact on workers of the sole proprietorship. 
  4. Collecting capital is a challenging task. Initial funds of the business are made by the owner and raising funds for the business can be difficult since they cannot issue stocks or other investment income. Loans may also be challenging if the owner does not have enough assets to protect additional money. 

Examples of Sole Proprietorship

Sole proprietors possess a business in many industries. Many home-based businesses are run by sole proprietors. Below are some of the examples of the sole proprietorship. 

  1. Bookkeeping Business 

A bookkeeping business provides the financial requirements of other businesses. A bookkeeper supports a company’s income, expenses, and other financial information to an accounting system. This provides business owners with detailed financial information concerning their business. The financial information managed by a bookkeeper is used to make a company’s tax returns. 

  1. Financial Planner

Sole proprietors serve as financial planners, giving their services to individuals and small businesses. They support families’ plans for retirement, save for college expenses, and invest in securities. Financial planners providing businesses may support a company set up its employee retirement packages and other employee bonuses. 

  1. Computer Repair Services

Computer repair companies are often run as sole proprietorships. Some business proprietors run commercial shops, while others work from home. Small computer repair businesses typically cater to individuals. 

  1. Catering Company

Catering companies offer their assistance for parties, weddings, church functions, and business events. In most events, a sole proprietor running a catering company requires to hire employees. 

  1. Freelance Writer

Some freelance writers work as independent entrepreneurs, while others begin small publishing firms. A freelance writer gives content to business owners or writes content to sell to consumers. Press releases, sales copy, website content, and blog posts are commonly given by freelance writers. 

These are the complete knowledge about sole proprietorship and its advantages and disadvantages with some examples of sole proprietorship which will help you in giving an idea of choosing the form of your business. If you find difficulty in understanding anything do let us know we will like to help you.