A sole proprietorship is the simplest type of business to start and operate. It doesn’t require incorporating which saves a lot of paperwork and procedural complexities. Business owners who do not have employees often choose to be sole proprietors because it is much simpler.
What sets a sole proprietorship apart?
A sole proprietorship has several qualities that set them apart from other business structures and types. These key traits include:
- Simple Structure: Many business structures require lots of paperwork to be compliant with specific governmental and regulatory protocols. A sole proprietorship generally requires very little paperwork to get started.
- More Affordable: Since there is very little required reporting, a sole proprietorship is usually less expensive to start and operate. Forming an LLC or an S-Corp requires fees ranging from $50 to $500. In many states, ongoing fees are required.
- Name Protocol: A sole proprietor has the flexibility to use their personal legal name without needing to register the name unless, of course, you want to create a business name.
- Profit Structure: In a sole proprietorship, profits go directly to the business owner instead of to the business entity. Also, any losses are claimed on the personal tax return of the business owner.
Is it hard to form a sole proprietorship?
It’s easy to create a sole proprietorship. If you start a business by yourself, you become the sole proprietor automatically. You do have the option of choosing to incorporate or form an LLC at some point, but it’s not necessary. Here are the basic steps for starting a sole proprietorship or any business.
- Name the Business. You’ll have to choose a business name for tax purposes. You can make up a business name if you prefer, or it can be your full personal name. Check with your state as some states require that a business name be distinguished from registered businesses.
- Business License or Permit. Your local or state government might require permits or licenses. Make sure to check with your local regulatory entities and secure any permits or licenses required to function legally.
- Business Bank Accounts. A sole proprietor can operate under their own name and manage business income using their personal bank accounts. There is also the option of opening a business account with a fictitious business name and a “doing business as” account. It is often beneficial to keep your business and personal accounts separate, especially if you plan on seeking outside financing as some point.
- Create a Website. It’s not a requirement to create a website, but most businesses today find having a web presence immensely valuable. You want to make it easy for prospective clients to find you and learn about your company.
Top Advantages of Sole Proprietorships
Setting up a sole proprietorship is simple and doesn’t have a lot of reporting requirements. These are two advantages, but there are several more. For instance, you can run the business using your personal name without having to register the business name. There is no need to go to the expense of trademark protection. Whether the sole proprietorship is a home-based business, a side business, independent contractors, or a small startup, there’s no need to spend time, money, or energy worrying about formalities.