If you are looking to fulfill your dream of becoming a business owner – having to make the decision concerning your future business’s legal structure can be a difficult task, especially when you are just at the start of the journey. Business structures come in many shapes and forms, and they are definitely not all created equal. The way you structure your business will determine many important matters like how you pay taxes and the amount of liability you have to take on.
If you are looking to stand as the lone person responsible for your business, then it may be best to follow a sole proprietorship model.
In order to help all the business owners who are considering this model, here is everything you need to know about the role of sole proprietorship.
1. What is Sole Proprietorship?
Being the oldest simplest form of business ownership, a sole proprietorship is a term used to describe a business owned and run by a single person. In simple terms, the owner is the business, and there is no legal separation between the entities. If your business is registered without a designated structure – it automatically becomes a sole proprietorship.
2. What are the Benefits of Sole Proprietorship?
There are many reasons why people choose sole proprietorship instead of other operating models. Apart from being the easiest way to start and operate a business, here are the main benefits:
Being completely in charge of the company’s business decisions and priorities – you can shift goals or objectives and adjust schedules as you please without having to worry about the impact of your choices on the partners.
As sole owner, your business income and losses will be reported on your personal tax return -with a Schedule C form on your 1040 tax return. Other than that, there is no need to figure out different ownership percentages and shares, and your taxes might potentially be subject to some credits and deductions along the way.
Fewer Legal Requirements
From a paperwork standpoint, you do not have to keep a lot of documents to maintain the legal status of your business – especially when compared to owners of corporations and LLCs.
3. What are the Disadvantages of a Sole Proprietorship?
Every type of business structure has its own drawbacks, and sole proprietorship is no different. Here are some of the main disadvantages:
As a sole proprietor, you will have full and personal liability for the business’s debts and obligations. There are often minimum protections for you as a business owner and as you and your company are considered the same entity legally, issues regarding lawsuits and debts can affect you and your personal assets
Harder to Raise Funds and Land Important Clients
Big customers and major vendors are more likely to take you more seriously when your business is structured as a corporation or LLC. In a ZenBusiness guide to LLCs in North Dakota, the steps taken to form an LLC are laid out for new businesses to follow. You will see that it is more complicated than a sole proprietorship, but there are usually more protections and opportunities to grow. This is true not just in North Dakota, but across the states.
While sole proprietorship structure still dominates the small business world, there are some major drawbacks. When planning the structure of your small business, it is really important to consider every potential framework. Sole proprietorships, LLCs and corporate structures all have their positives and negatives so make sure that you are able to make a well informed decision.