Sole Proprietorship: Is it the right business structure for you?
- Team KAS
- Apr 30, 2023
- 4 min read
Updated: May 23, 2023
Got a great idea for a business, but not ready to commit to a more official structure? Sole proprietorship might be the way to go!
You wake up one day and decide that the business world has gone long enough without your presence and you are ready to dip your toes into the world of commerce. After all, you've been nourishing a dream of owning your own business. What might have started out as a tiny seed in the back of your mind has now grown into a fully grown plan of action that you're ready to implement.
Now for the technical part: How do you get started? What paperwork should you file? Does it make sense to become incorporated or start an LLC? Where are you going to get the money to structure your business properly? Do you even need to go through the trouble of concerning yourself with business structures so early? Could you just start selling your product or service and worry about the rest later?
If these are some of the questions keeping you from moving forward with your business idea, starting out as a sole proprietorship might be right for you. According to the Small Business Administration (SBA), about 73% of small businesses in the US are sole proprietorships so you'd be in good company.
What is a Sole Proprietorship?
So what exactly is sole proprietorship and how do you know if your business meets the requirements? Let's dive in. The IRS defines a sole proprietor as "someone who owns an unincorporated business by himself or herself". Essentially, whether you consider yourself an owner, freelancer, consultant or independent contractor, any business that has not gone through any formal structuring is automatically considered a sole proprietorship. As long as the business:
Is operated by a single individual (more than one owner and the venture becomes a partnership)
Appears as part of the owner's personal income tax on a Schedule C.
Has not established a legal distinction from the owner in terms of liability for debts, malpractice, losses, etc.
Fun Fact: Even though most people think that once they file LLC paperwork they are no longer considered a sole proprietor, this isn't true. The distinction is made in how the company files taxes. But more on that later...
Pros
Operating as a sole proprietor is a great way to get your business ups and running fast and may even make sense for some business long term. The benefits to sole proprietorship include:
Simple/quick startup: No need to file any paperwork to make your business an official entity (you may have to gain the appropriate permits/licenses however).
Avoid decisions by committee: Since you're the sole owner you don't have to get agreement from a partner, additional members, or a board of directors.
Keep all of the profit: No need to split what you make or pay corporate taxes.
No separate tax documents to file: since you retain all of the income, you do not need to file an 1120s or 1065 like corporations do.
Privacy: Since there is no paperwork to file and no need to keep minutes of board meetings, your business can operate without giving others access to it inner workings
How is your business structured?
0%Sole Proprietorship
0%Partnership
0%LLC or PLLC
0%Corporation
Cons
Before you run out and start twelve sole proprietorships, not everything about having one is a walk in the park. There are some drawbacks to not having established an official structure for your business. The disadvantages include:
You're the bank: All capital investments (money) comes from you since you cannot sell stock or seek additional investors. This means you are responsible to raise the money for any expenses your business incurs. Any loans you secure will generally require personal collateral and depend on your personal credit until you can build the business's credit.
It's all on you: As a sole proprietor, everything is on the line. If your business ever folds or falls into debt or if your business is ever sued, both your business and personal assets can be seized as payment.
Gaining traction can be hard: Since it's just you, some entities (governments, consultants, banks, even other business) may choose not to do business with you because they see you as less established that other business with legal structures.
Selling can be hard: Since you are the face (and the hands, and the brains, etc.) of the business stepping away can be difficult as your customers may be adverse to changes in management. What's Bob's Knick-Knack Emporium without Bob, right?
Paying Self-employment tax is NOT fun: While you get all of the income from your business, you also have to deal with self-employment tax which is something that corporations avoid.
How To Get Started
For many businesses, that are just starting out, sole proprietorship can be a godsend. If you think that it may be the correct structure for you that's great! We'd love to hear your ideas and brainstorm with you on how to get your business ups and running. Feel free to schedule a business growth consultation (click the button below) with us and we can get you on the road to business ownership!
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