Understanding the Sole Proprietorship Business Structure

Sole proprietorship is one of many business structures that can be selected for your company. By definition, a sole proprietorship is legally specified as a business that:

  • Is owned by a single individual
  • The single individual collects all the profits from the business
  • The single individual has unlimited liability for the business debts

Legally this means there is no separation between the owner and the business. A large majority of United States businesses are sole¬†proprietorship’s.

Advantages of a Sole Proprietorship

The sole proprietorship structure is extremely simple; in fact it is the most simple of the business structures. Tax accounting is much more simple, as the business owner will report business income and costs on their personal income tax return. Decision making is more simple as well, because there is a single individual making the management and business decisions.

Disadvantages of a Sole Proprietorship

Because there is a single individual responsible in a sole proprietorship, it can sometimes mean a very heavy workload for that person. None of the business responsibilities are divided among parties, including the tasks of setting up, operating and expanding the business. It can also be a heavy financial load for the owner, as the single individual is responsible for raising capital for the business. Unlimited liability also poses a risk to the owner, as their personal assets can be considered as the assets of the business by the court.

Requirements for Establishing a Sole Proprietorship

When considering setting up a sole proprietorship, the government regulations of the federal, state and local jurisdictions must be taken into account. Sole proprietorships are the most simple business structure, and thus are fairly easy to set up. Most local governments will require a business license, but you must check with your local government to be sure. In addition, to be considered a sole proprietorship you should have a business name and taxpayer identification number. You will want to name your business something that is impactful and will serve your company well as you emerge into the marketplace. Usually a sole proprietorship will use the Social Security number of the owner as the taxpayer identification number. For other structures, the company must register for a taxpayer identification number. When selecting the business name, it is imperative that branding guidelines are taken into consideration.

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