What Is a Sole Proprietorship?
Everything about sole Proprietorship
The term “sole proprietorship” is the most naive form of a business operated by a single person (whosoever), and this form of business is considered autonomous and unincorporated. Sole Proprietorship merely refers to an individual who holds that business and is solely accountable for all obligations, including debts. This form of business (sole Proprietorship) can be run under the title of its owner or a fabricated title like DBA, “doing business as,” or “business in which a person owns and runs.”
For instance, Lars Lehman’s garage and the owner of such a business are called sole proprietors. Each company is run under some name that is also termed a trading name, which is not meant to create any legal entity different from the sole Proprietorship. More than twenty (20) million sole proprietorships presently operate in Canada and the United States, making it the most prevalent type of business ownership.
Sole proprietorship definition – What does sole proprietor mean?
In more scientific words, the sole Proprietorship can be defined as “A form of business that carries no separate existence from its true owner.” This form of business (sole Proprietorship) is straightforward and popular due to its minimalism, simplicity of setup, and minimal budget.
Sole Proprietorship Registration
A sole proprietor must only register the name (as discussed above) and obtain a local business license. Once done, the field is ready for a sole proprietor to run a business legally. Yet, a distinctive shortcoming is that this business’s sole proprietor remains personally and legally responsible for all the business’s debts.
How a Sole Proprietorship Works
In case of Loss
Therefore, if a sole proprietorship business faces any losses or financial troubles, creditors can launch lawsuits against the business owner. If the lawsuits succeed, the sole owner will be compelled to pay such business debts from his money. A sole proprietor usually signs all the agreements and deals in his/her name since this form of business does not carry a discrete identity under the Law. Sole business owners in sole proprietorships can launch lawsuits using their names.
Personal and Business Funds
The owner of such a business has customers to deal with. Thus, the customers issue checks in favor of the owner’s name, even if a fictitious name is used for that business. In the case of a sole proprietorship, the business owners keep their funds and business property together, maybe in one account. In contrast, partnerships, LLCs (limited liability companies), or corporations (another form of business) cannot do so.
The sole business proprietor commonly maintains bank accounts in their name. Business owners as sole proprietorships are not required to observe rules and regulations like voting and meetings associated with and mandatory with other complex forms, such as an LLC (limited liabilities company). Many businesses begin as sole proprietorships and graduate to more complex business forms as the industry develops.
Taxation and Returns
In this form of business (sole Proprietorship), the business owner is indistinguishable from the business; thus, the taxation process is relatively easy. Whatever the income produced through this form of business, which is a sole propp, is known as the owner’s income. The business owner reports the sole proprietorship earnings, losses, and expenditures by completing a Standard Form (Form 40) and filing a Schedule C. Through this process, first profits and losses are recorded on a tax form called (Schedule C), which is filed along with 1040. Then, the “bottom-line amount” from Schedule C is transmitted to your tax return. This characteristic is striking because any losses in business losses the owner suffers may counterbalance income received from any other sources.
In a sole proprietorship, as a business owner, you are supposed to file a Schedule SE with Form 1040. You may have information from Schedule SE to calculate the amount of tax as self-employment you owe. You are not required to pay any unemployment tax on yourself, though you are bound to pay the unemployment tax on any business employees you have. In this case, as a business owner, you won’t be able to enjoy unemployment benefits from the state should the business suffer.
Sole Proprietorship and Liability
In doing business (as Sole Proprietorships are), the business owners are personally accountable and liable for all business dues and debts. Examining the probable liability is essential since it can be frightening.
Example number 1
You can comprehend a hypothetical situation very clearly. Assume that Mr. Lars (a sole proprietor) borrows some cash to operate his business. However, for any reason, the company faces a loss, moves out of business, and cannot repay the loan. Yet, the sole proprietor (business owner) is liable for the money he took as a loan, which can consume all his personal property, funds, or other assets.
Example number 2 (worst scenario)
Assume one employee of the sole proprietor is tangled in a business-related accident; thus, someone gets poorly injured or killed due to some avoidable circumstances. Consequently, the victims launched a negligence case against the sole proprietor (business owner), properties, funds, or other personal assets, including personal bank accounts, home, and retirement accounts. Don’t forget to carefully deliberate on the previous passages before choosing a sole proprietorship as your business form. Accidents do occur, and businesses go out of business all the time. In the case of a sole proprietorship that suffers, any business owner in such an unlucky situation can swiftly become a nightmare for its proprietor.
The advantages of a sole proprietorship
Several advantages and benefits can be availed by the business owners engaged in sole proprietorship form of business described as follows;
- This form of business (sole Proprietorship) can be established instantly and easily with a limited budget.
- Registration of such a business (sole Proprietorship) does not take a long time from start to finish.
- There are a limited number of allied ongoing formalities to be considered while operating the business, so it is hassle-free to start with
- This business form also carries the advantage of not paying unemployment taxes on h/herself, although the owner must pay unemployment tax on current employees.
- Owners may freely mix business or personal assets.
The disadvantages of a sole proprietorship
If any form of business has some advantages and benefits, it also has some limitations and disadvantages, as described below;
- Business owners engaged in sole Proprietorship are subject to unlimited liabilities for the number of losses and debts personally.
- In a sole proprietorship (a form of business), the business owners are not allowed to raise any capital by selling (such as shares) an interest in the industry.
- Sole proprietorships (a form of business) hardly survive because of the owner’s incapacity and do not maintain value.
One of the countless features and benefits of a sole proprietorship (a legal form of business) is its uncomplicated formation. A little more than procurement and selling products or services are required. No formal filing or event is needed to establish this type of business. It is a position that ascends automatically to one business activity.
After leaving Wells Fargo Bank in 2014, Daniel began a career as a finance consultant, advising companies and individuals on economic policy, labor relations, and financial management.
At Nimblefreelancer.com, Daniel writes about personal finance topics, value estimation, budgeting strategies, retirement planning, and portfolio diversification.
Read more on Daniel Smith's biography page.
Contact Daniel: daniel@nimblefreelancer.com
