What is A Sole Proprietorship And How To Start One

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17 Oct 2022
6 min read

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"The owner may be held personally liable for the activities of the business." Sole Proprietorships are one-person businesses and are famous among sole proprietors, self-employed people, and consultants. Examples of sole- proprietorships include freelance writers, IT consultants, freelance graphic designers, running an accounting business, home health care, etc. There are various characteristics of sole proprietorships, like one-person business, absence of a separate business entity, no distinction between an economic entity, unlimited liability, self-owned profits, losses, and fewer steps. There are various advantages like self-owned business, maximum privacy at low costs, ease to set up a business, etc. but it comes along with disadvantages too, like limited raising capital, being taxed as an individual, no legal distinction between personal and business assets, etc. Another type of business is a limited liability company (LLC) is a corporate structure permitted by state law. Each state may have different rules, so you should check with your state if you are interested in registering a limited liability company. The owners of an LLC are called members. There are differences between LLCs and Sole Proprietorships. Setting up a business as a sole proprietor has a procedure that needs to be followed. Setting up a business as a sole proprietor is more advantageous in comparison to LLCs as it offers a personal financial future along with recognition. 

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What is Sole Proprietorship?

A Sole Proprietorship is a type of business owned and operated by one person, and there is no legal distinction between owner and business entity. A sole proprietor is a person who owns a business and is not a legal entity. However, if you are the sole member of a local limited liability company (LLC), you are not the sole owner if you treat the LLC as a legal entity.

A private business is the easiest type of business to set up or liquidate as there is no government regulation. Therefore, this type of company is very popular among sole proprietors, self-employed people, and consultants. Most small businesses start out as private traders and either stay the same or grow into limited liability companies or corporations. An individual owner may use a trade name or trade name other than its legal name. Many jurisdictions have rules that can determine the actual owner of a company name.  It is considered best because of minimum documentation and low corporate costs.  

Examples Of Sole Proprietorship:

Local grocery stores,  local clothing stores, small businesses such as artists, freelance writers, IT consultants, freelance graphic designers, running an accounting business, home health care, providing and managing computer repair services, landscaping business, etc. 

Characteristics Of Sole Proprietorship

1) One-Person Business In a one-person business, only one person owns the business. 

2) The absence of a separate business entity

3) There is no distinction between an economic entity and an owner. Both are the same. Thus, in the separation of ownership and management, in ownership, management is the owner itself, and the owner is also the manager. 4) Unlimited Liability: In the event of damage, the owner's personal property can also be used to fulfill business obligations to third parties. 

Also Read: What is a sole proprietorship and how to start one

5) All profits or losses of the owner As the sole owner of the business, the owner receives all profits and burns all losses arising from the business. 

6) As fewer steps are present you can create your own company without long legal procedures. Some businesses can only be started after "obtaining the necessary permits and production permits".

Advantages Of Sole Proprietorship 

1)You are the boss of your work.

 2) You are the owner of all your profits. Maximum privacy at low corporate costs.

3) Easy to set up and run a business.

4) Easy to change legal form later if circumstances change.

5) Closing a business is easy depending on the situation.

Also Read: Sole Proprietorship 101: The Easy Guide to Setting One Up

Disadvantages Of Sole Proprietorship

1) Since, there is no legal distinction between personal and business assets, you have unlimited liability for your obligations.

2) The possibility of raising capital is limited.

 3) You are responsible for all your day-to-day business decisions. 

4) You are taxed as an individual. 

5) The age of the company is limited.

What Is An LLC?

A Limited Liability Company (LLC) is a corporate structure permitted by state law. Each state may have different rules, so you should check with your state if you are interested in registering a limited liability company. The owners of an LLC are called members. Most states do not restrict ownership, so members can be individuals, corporations, other LLCs, and foreign companies. There is no maximum number of members. Some types of companies cannot be LLCs at all, like- Banks and insurance companies.

Also Read: 5 Things You Need To Know About Social Media Marketing

Difference Between Sole Proprietorship And LLC

A sole Proprietorship is a low-risk business that doesn't need insurance, is easy to start with fewer funds and assets, and can be done from home. But in the case of LLCs high risk with higher funds, assets, and insurance is involved, and this can't be done from home also it has many members so decision-making is difficult which is not the case in sole Proprietorship. Also, for anything that happens in a business be it profit or loss in sole proprietorship one person is responsible but in LLC all members are responsible.

How To Start A Sole Proprietorship?

1. Decide on the name of the company: The company name can be attractive. The company name identifies you and the product or service you offer. People will associate you with this name, so it's important to represent your business well.

2. Register your DBA company name: DBA filing requirements vary by state and may require state or local filing. Contact the office of the secretary of state or the registrar for the region where your company is located.

3. Buy and register a domain name: A unique URL used to direct traffic to a specific website is a 'domain name.' Depending on the domain registrar you use, you may need to search by name to see if it's available. Keep your domain name as close to your company name as possible.

4. Apply for a TIN: After you apply for a DBA, you can also apply for an Employer Identification Number (EIN) on the IRS website. The EIN identifies your business for tax purposes.

5. Obtain a Business Permit and Permit: Depending on the nature of your business, you may need to apply for an operating license or work permit. This permit is issued by the government, which allows sales tax to be collected and then remitted to the government.

6. Get business insurance: Sole proprietorship has both advantages and disadvantages. Unfortunately, as a sole trader, your business obligations are also your personal obligations. It is recommended that you purchase small business insurance. If you do not have insurance, you are responsible for all costs.

 7. Open a commercial bank account: For an individual trader, opening a business account is not mandatory, but can be very beneficial. A business bank account helps you manage your business finances. Separating business and personal accounts makes it easier to determine business expenses and file taxes.

Conclusion

Choosing sole proprietorship is better than a partnership because real estate income is taxed at a lower rate as it is considered personal income and may be taxed less than other forms of business ownership. Sole ownership also simplifies and speeds up decision-making and empowerment. The fact that a sole trader is in control of the entire business and can react quickly to changes is an advantage in a rapidly changing market. Those who benefit from the excitement of finding a new owner benefit from the control they have over their personal financial future and the recognition they receive as business owners.

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