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 name or under 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 business 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 are presently operating in Canada, and the United States, making it the best 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 license to operate a business. Once it’s 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 legally responsible for all the business’s debts.
How a Sole Proprietorship Works
In case of Loss
Therefore, if a sole proprietor business faces any losses or financial troubles, the creditors can launch litigations against the business owner. If lawsuits are succeeded, then 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 h/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 though 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 h/her name. Business owners doing business as sole proprietorships are not required to observe rules and regulations like voting and meetings associated and mandatory with other complex forms, for instance, LLC (limited liabilities companies). Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops.
Taxation and Returns
In this form of business (sole proprietorship), the business owner is indistinguishable from its business; thus, the taxation process is relatively easy and simple. Whatever the income produced through this form of business that is a sole proprietorship, is known owner’s income? The business owner reports the sole proprietorship earnings and/or 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 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 amount of unemployment tax on yourself, though you are bound to pay the unemployment tax on any employees of the business 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 proprietorship are), the business owners are personally accountable and liable for all dues and debts of a business. It’s essential to examine very thoroughly since the probable liability can be frightening.
Example number 1
Through a hypothetical situation, you can comprehend very clearly; assume that Mr. Lars (a sole proprietor) borrows some amount of cash to function his business, but due to any reason, the business faces a loss and moves out of business, and incapable of repaying the loan. Yet, the sole proprietor (business owner) is liable for the money he took as a loan, which can munch 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 injured badly or killed due to some avoidable circumstances. Consequently, the victims launched a case of negligence against the sole proprietor (business owner) and h/her properties, funds, or other personal assets, including personal bank account, home even retirement accounts. Don’t forget to deliberate the previous passages cautiously before choosing a sole proprietorship as your business form. Accidents do occur, and businesses go out of business all the time. In case of a sole proprietorship that suffers, any business owner, such an unlucky situation, is prospective to become a nightmare for its proprietor swiftly.
The advantages of a sole proprietorship
Some several advantages and benefits can be availed by the business owners engaged in sole proprietorship form of business described as follow;
- This form of business (sole proprietorship) can be established instantly, easily with a limited budget.
- This process of registration of such a business (sole proprietorship) does not carry a long time from start to finish completely.
- There are a limited number of allied ongoing formalities to be considered while operating the business, so its hassle-free to start with
- This business form also carries an advantage not to pay any 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 benefit, that also has some limitations and disadvantages, described below;
- Business owners engaged in sole proprietorship form of business 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 business.
- Sole proprietorships (a form of business) hardly survive by their owners’ death or incapacity and do not maintain value.
One of the countless features and benefits of a sole proprietorship (a form of doing business legally) is the uncomplicated formation. A little more than procurement and selling products or services are required. The fact of the matter is, no formal filing or event is needed to establish this type of business, a sole proprietorship. It is a position that ascends automatically from one’s 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
