(Newswire.net — August 16, 2020) — There are many different types of business structure and the onus is on you to find the one that will best suit your business needs. To help you decide on what is best for your business, below is an exploration of what types of business are best suited to a sole proprietorship, and the advantages thereof.
A sole proprietorship is an informal and unincorporated type of business where there is no legal distinction between the business and the owner. Profits and losses of the business do not have a separate tax filing, as they are conveyed on the owner’s personal tax return filed with the Internal Revenue Service (IRS).
Should you wish to operate a business on a small scale and with very little risk, then a sole proprietorship could be the best business structure to use. This business structure means that you, as the owner, signs the checks, contracts, and lease agreements in your own name. However, you do have the option of filing for a DBA (doing business) should you wish to operate your business under a name different to your own. Filing for a DBA also gives you the ability to open a business bank account and accept payments made out to a made-up name.
What business type is best suited to a sole proprietorship?
There are three distinguishing characteristics of a business for which a sole proprietorship is the ideal structure:
1. It is absolutely essential that they are low-profit and low-risk. As such, they are less likely to suffer a financial loss or liability.
2. A business that works well as a sole proprietorship is one that doesn’t have a big customer base. In fact, they mainly provide goods and services to friends, family, and neighbours.
3. Most sole proprietorships start off as hobbies, and some examples are photography, blogging, or video streaming.
What are the primary advantages of a sole proprietorship?
According to the U.S. Small Business Administration, there are three main benefits of a sole proprietorship, and they are as follows:
1. Simple and economical to establish.
In contrast to other business structures, the sole proprietorship is the easiest and cheapest to launch. The costs are negligible, and the only legal costs involved are those of getting the required licenses or permits.
2. The owner is in complete control.
You are the only owner and as such you have complete power over any decisions that need to be made. If you want or need to change anything regarding the business, you are able to do so without having to ask or gain permission from anyone else.
3. Uncomplicated tax returns.
As there is no legal separation between you and your business, the business is not taxed as a separate entity. You’ll be taxed on your personal tax returns filed with the IRS. As an added bonus, when compared to other business structures, the tax rates are the lowest of all.
What are the differences between a sole proprietorship and an LLC, another popular business structure?
The primary difference between the two popular business structures is the notion of personal asset protection. Seeing as there is no legal separation between the owner and the business in a sole proprietorship, the personal assets (car, house, bank accounts) of the owner is fair game in the event of legal disputes or the bankruptcy of the business. The personal liability protection that LLCs offer means that the owner is not held personally liable should the business go through financial trouble. As such, even if the business goes bankrupt, your car, house, and bank accounts can’t be seized.
Want to learn more?
TRUiC offers an in-depth analysis of what a sole proprietorship is, the advantages thereof, and how it compares to other business structures. Read more here if you are interested in learning more on how to get started with your own business.