Sole Proprietorship: What It Is, Pros & Cons, Examples, Differences From an LLC

What is the Sole Proprietorship?

A sole proprietorship is also called a sole trader, or proprietorship. It is an unincorporated business that is managed by one person. This individual is responsible for paying any personal taxes on the company's profits. Many sole proprietors work under their own names as they don't need a separate trade mark or business.

Because there is no regulation, sole proprietorships are the easiest type of business to start or end. These types of businesses are popular with self-employed contractors, individuals and consultants. Most small-scale businesses start as sole proprietorships. They then expand to become corporate companies or limited liability companies.

Understanding the Sole Proprietorship

The sole proprietorship is the best and easiest way to start a business that is owned entirely by you. The sole proprietorship begins the moment you start to do business. This type of sole proprietorship is great for self-employed entrepreneurs because it doesn't require you to file any state-specific or federal forms. It also doesn't have any regulatory requirements.

A sole proprietorship is a legal entity that is not distinct from another. The sole proprietor of a sole proprietorship cannot be exempt from liabilities that the entity might incur.

There are advantages and disadvantages to being a sole proprietorship

One of the most important advantages of sole proprietorships is the tax benefits that include pass-through, as well the ease of creating or maintaining a business and the lower costs of doing so.

Let's start by discussing the tax benefits. Pass-through income is subject to a single income tax rate and may be eligible for a 20% tax deduction. Tax Cuts and Jobs Act 2017 The Tax Cuts and Jobs Act 2017, which has cut rates for corporate taxes and provided additional tax breaks for pass-through businesses , allows them to claim up to 20% of their QBI (or qualified business income) . This deduction is available until January and can result in huge savings. Unless it is extended by the next Congress, it will expire on January 1, 2026.

You don't need to complete a lot of forms if you're a sole proprietorship. You may need approvals or licenses depending on where you live and what type of business you are running. You can get your company moving faster if you don't have as much paperwork.

It is much easier to file taxes because you don't have to obtain the Employer Identification Number (EIN), from the Internal Revenue Service. An EIN can be applied for by making a decision to do so. However, your personal Social Security Number (SSN), can also be used to pay taxes.

A sole proprietorship does not require an enterprise banking account the same way as other business structures. You can manage all your financial transactions using an individual checking account.

One of the drawbacks to a sole proprietorship business is the unlimited liability that extends far beyond the owner. There are also difficulties in finding capital financing, especially through established channels such as the issuance of equity or getting banks to lend money or credit lines.

Certain legal security measures are available to protect a company that has been registered. A sole proprietorship, in particular, does not offer liability protection. However, an LLC is protected against creditors that want to seize personal assets such as their home.

Sole proprietorships can find it difficult to get funding. Companies with a track record are more likely to be accepted by banks. Banks are more inclined to work with companies that have a track record. It can be difficult to obtain equity from large investors.

sole proprietors are considered to be an entity with unlimited liability. As the business grows, the company often transforms into an entity that has limited liability, which gives security to its owners. This could be an LLC, LLP, or a corporation (e.g. S corp, corporation or benefit corporation).

A Sole Proprietorship example

Many small businesses start as sole proprietorships. As the company grows, they become more complex legal structures.

Kate Schade, for example, was the sole owner of Kate's Real Food. The company makes and sells energy bars. It began as a Jackson Hole-based retailer. It currently operates a Bedford, Pa. office for production and sells at over 4,000 stores.

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Transfer to Sole Proprietor to LLC

Most people incorporate their company as an LLC when they want to. The owner of the company must decide if the name they want is available in order to make this happen. If the desired name is not available, articles for organization must be filed at the state offices where the company will be situated.

Once the paperwork is filed, the LLC operating agreement must be drafted by the business owner. It describes the business' structure. The company will then need an EIN from the IRS. This is similar to an SSN but for business-related entities.

Sole Proprietorship Tax Forms

Sole proprietors report their income and expenses on personal tax. They pay tax on both their income and self-employment tax. You will need to file the following tax forms: