A sole proprietorship is a form of business ownership commonly utilized by small businesses. There is only one business owner in a sole proprietorship. A sole proprietorship typically conducts business under a trade name or under the owner's own name. There is no limitation on the number of employees a sole proprietorship may have. As in any type of business, there are unique advantages and disadvantages to a sole proprietorship.
Advantages of a Sole Proprietorship
One of the foremost advantages of a sole proprietorship is that of taxes. Since the law makes no distinction between the owner and the business, a sole proprietorship does not have to file a separate tax return and there is no threat of "double taxation." Double taxation occurs when both a person owner and a business pay taxes on income. Instead, the owner reports all the business's profits and losses on their personal taxes using IRS Form 1040 and Schedule C. The owner may take advantage of any "pass-through" business income or losses on their individual or joint tax return. This may reduce the total income tax burden of the sole proprietor.
Generally, there are no start-up costs or state filings required for the initiation of a sole proprietorship, although local governments may require some sort of business filing or tax payments. Since there is only one owner, the owner has full control over business operations and decisions.
Disadvantages of a Sole Proprietorship
A primary disadvantage to a sole proprietorship is that the owner has unlimited liability for the debts or liabilities of the business, unlike a corporation or limited liability company ("LLC"). Thus, both personal and business assets, such as business bank accounts, business equipment, accounts receivable, personal bank accounts, and the owner's home or personal vehicles, can be accessed to pay the business's debts. For example, if a slip-and-fall occurs on business property, the owner could be held individually liable for any injuries.
Another disadvantage is that it is often difficult to raise the initial capital or obtain bank financing for a sole proprietorship business. Additionally, one may not sell or transfer ownership of a sole proprietorship to another person.
The primary tax disadvantage is that since the sole proprietor is responsible for all business income, his overall personal tax liability might increase along with the tax rate on that income. If the owner files a joint return with a spouse, the marital tax liability may likewise increase. The other tax disadvantage is that a sole proprietor may not take deductions for health and life insurance. In addition, a sole proprietor is still responsible for self-employment taxes and for making estimated tax payments.
It is vital to balance the advantages and disadvantages of each business form against your personal and business needs when deciding upon which business entity to choose for a new business. Because there are significant tax and legal implications involved in using a sole proprietorship to conduct business, it is important to be aware of these implications and the consequences of initiating a sole proprietorship.
LawServer is for purposes of information only and is no substitute for legal advice.
© 2013 LawServer, Inc. All rights reserved