What is sole proprietorship in business? Do you know who a sole proprietor is? Are you a sole proprietor?
If you struggle to answer these questions, you need to find their answers.
Fortunately, this article shares essential information about what sole proprietorship is in business.
So, take advantage of it and carefully read it till the end.
What Is Sole Proprietorship? – What Is Sole Proprietorship in Business
A Sole proprietorship is an incorporated business owned by one person, known as a sole proprietor trader.
A sole proprietor is responsible for establishing a business and running and operating it.
They are completely in control of every affair of the business.
However, they are required to pay personal income tax for the business-generated profits.
Several sole proprietors operate their businesses with their legal name, so creating a trading name for a sole proprietorship isn’t necessary.
Due to little government regulation, sole proprietorships are the easiest business type to establish.
This factor makes sole proprietorships the most common business type in every location.
Most sole proprietorship businesses include decorating, painting, self-contractor, etc.
Sole proprietorships can grow, expand and transition into a corporation or limited liability business entity.
So, you can decide to transition into a limited liability company or remain a sole proprietor.
Features of Sole Proprietorship – What Is Sole Proprietorship in Business
To better understand sole proprietorship, here are its features:
Sole proprietorships are businesses owned by one person.
This person establishes, operates, and runs the daily activities of the business.
A sole owner is also referred to as a sole proprietor or trader.
They decide on everything concerning the business with no obstruction from any other party because they have complete authority.
This helps to prevent disputes that often arise when there are multiple owners.
Simplicity – What Is Sole Proprietorship in Business
Amongst the different types of businesses, sole proprietorships are the simplest.
This is because it is easy to set up, manage or dissolve.
You don’t need to register a sole proprietorship with the state.
However, you might need a business license or permit to operate.
No Sharing of Profit or Loss
When there is more than one owner, any profit or loss incurred by the business will likely be shared among the owners.
However, that doesn’t happen with sole proprietorships.
In a sole proprietorship, there is only one owner who bears the risk of the business.
Therefore, only that owner can enjoy the rewards (profits) and the business losses.
Although a sole proprietor might have employees working for them, they never share the profits with them but only pay wages and salaries.
Unlimited Liability – What Is Sole Proprietorship in Business
A sole proprietorship comes with unlimited liability.
This means that sole proprietors are responsible for the debts or liabilities of their businesses.
Furthermore, the business is not a legally separate entity from its owner.
In other words, the business and its owner are the same.
This factor makes sole proprietors take the fall for their business every time.
Sole proprietorships are not just known for their simplicity but also for their minimal formalities.
Unlike other business types, sole proprietorships don’t have a lot of reporting requirements.
You need just a few documents for registration.
Advantages of Sole Proprietorship – What Is Sole Proprietorship in Business
If you run a sole proprietorship or choose to run one, here are some of the amazing benefits you will enjoy:
Easy to Establish and End
Due to its simplicity and minor formality, a sole proprietorship business can be easily established.
You can start your business easily when you have your capital (no matter how small).
You won’t need to register or follow difficult legal formalities.
However, you might need to get your business licenses or permit from your local authorities to operate.
Like establishing, it’s also quite easy to end your sole proprietorship business.
You are in charge of everything.
So it’s your discretion to establish or end your business anytime.
Quick Decision-Making – What Is Sole Proprietorship in Business
As a sole proprietor, you are responsible for the decisions in your business.
Of course, you can seek advice and consult people, but you can decide without others.
As a result of not having any party involved in your business decision-making process is quicker.
You can also implement those decisions much faster.
In a sole proprietorship, the reward (profits) of starting a business and bearing its risks and losses belongs to the owner alone.
This creates a link between an owner’s effort and their reward.
In other words, the harder you work, the higher the possibility of gaining more profit.
A sole trader will only gain reward from themselves.
This direct link makes owners motivated to do their best.
Better Control – What Is Sole Proprietorship in Business
As a sole proprietor, you have complete control over the different activities of your business.
You are the planner, organizer, and manager of every activity.
As a result, you will be capable of excising better control in your business.
Close Working Relation
In a sole proprietorship, the owners work closely with their employees and customers.
As a result, it can help them know these people better and build better relationships.
This will help you satisfy your customers better and maintain friendly and close relationships with your employees.
All of which will help your business to run smoothly.
Confidentiality – What Is Sole Proprietorship in Business
In business, there are times and things that you need to keep hidden from external parties such as competitors or customers.
It could be your business strategies, secret recipe, technical competencies, etc.
In a sole proprietorship, it is easier to keep things confidential.
This is because business management is in one person’s hands.
Such a person can keep those personal issues or business information to themselves.
A sole proprietor can change the scope or nature of their business operations at any time of their choosing.
They can also decide to curtail or expand their business.
For example, let’s say you own a bookshop where you sell books to school students.
Assuming you’re considering expanding your business to sell stationery items such as pencils, pens, registers, etc.
You can easily expand your business without having to go through any legal process.
Overall, the flexibility in operating a sole proprietorship can help you meet customers’ needs at any time.
Supports Self-employment – What Is Sole Proprietorship in Business
One great advantage of sole proprietorships is that they create employment opportunities.
And this is not just for the business owner who gets self-employed when they start their business but for other people who get to work in those businesses.
This business type works extensively in reducing unemployment and poverty conditions.
Disadvantages of Sole Proprietorship – What Is Sole Proprietorship in Business
Everything has its downsides, and sole proprietorship is no exception.
So, if you are running a sole proprietorship business, you need to be aware of these downsides and work to ensure that they don’t lead to the failure of your business.
Or if you are considering starting a sole proprietorship business, you should know these downsides and weigh them with the benefits.
This will help you to know if starting a sole proprietorship will be the best for you.
The following are some disadvantages of a sole proprietorship:
Limited Capital – What Is Sole Proprietorship in Business
When raising capital for a sole proprietorship business, the owner does it alone.
They use personal savings and assets and might borrow from family and friends.
However, they often need help to raise sufficient funds for their business growth.
A sole proprietorship and its owner share the same legal identity.
As a result, sole proprietorships are dependent on their owners.
This makes a sole proprietorship business filled with many uncertainties.
If an owner should die, go bankrupt, or become insolvent, their business will cease to exist.
Unlimited Liability – What Is Sole Proprietorship in Business
When sole proprietorship business funds cannot pay for its debts or liabilities, the business owner will be responsible for it.
In other words, the owner will have to use personal assets and funds to sort out their business’s financial issues.
This can make owners over-cautious in taking the risk needed for their business’s growth.
Little or No Managerial Expertise
Sole proprietors are solely responsible for their business management.
They can either manage their business themselves or employ a professional.
Owners who choose to manage their businesses themselves sometimes struggle because they don’t have all the necessary managerial skills and expertise.
Employing a professional to manage their business can also be tasking due to limited resources.
Thus, most sole proprietorship lacks professional management.
Limited Size – What Is Sole Proprietorship in Business
Sole proprietorships often cannot expand their activities beyond a limit.
This is because one person cannot effectively manage and supervise the operations of a business that is grown far beyond their control.
As a result, sole proprietorships are often of limited size.
How to Set Up a Sole Proprietorship – What Is Sole Proprietorship in Business
Indeed, sole proprietorships are easy to set up, and you don’t need to follow any set regulations.
However, you might still need to protect your business better and make it more professional by taking the following actions:
Chose a Business Name
Sole proprietorship businesses don’t necessarily need to have a name as, most time, your legal name can be your business name by default.
However, you need to understand that your business name represents your services and products.
It should be something that resonates with your business agenda to customers.
Also, using your name as your business name isn’t very professional.
So, instead of going with the default name (your name), you can choose a separate name (DBA) for your business.
Register the DBA – What Is Sole Proprietorship in Business
If you decide to operate your business with your legal name, you don’t need to take further action.
In other words, you don’t need to register your business to operate.
For payment of taxes, you need your social security number.
However, if you choose to use a DBA (doing business as) name, you’ll need to register it.
This won’t change your business from being a sole proprietorship.
Instead, it only indicates that you will be operating under a different name.
You need to ensure that no business in your jurisdiction is using your chosen name.
The process and requirements of filing a DBA vary in different states.
So, find out the requirements and follow them to file your DBA at your local or state level.
Get a Domain Name
The world has developed to the point where a great percentage of buying and selling takes place on websites and other online platforms.
You need a website if you want your sole proprietorship business to be known by a vast audience.
On your website, people can learn more about your services and products.
Since you already have a DBA, you need to purchase a domain name next.
Domain names are unique URL addresses that provide a direct link to websites.
The domain name you pick and purchase will be unique to your business website.
So, when purchasing and registering a domain, check if the name you picked isn’t in use.
If it is, you will have to pick something different.
While doing this, try as best as possible to choose a domain name that matches your business name.
Obtain an EIN – What Is Sole Proprietorship in Business
The IRS requires sole traders to file for an employee identification number (EIN) if they pay excise taxes or have employees.
If you don’t have workers or don’t have any intention of hiring, then you don’t need EIN.
Fortunately, even without your EIN, you can still fulfil your tax requirements with your social security number.
However, if you will hire employees, you will have to file EIN.
You can easily file for it on the IRS website.
Immediately after completing your application online, you will get an EIN.
EIN also comes in handy when opening a bank account for a business.
Get Business Permits and License
Every state has its requirements for different licenses for specific professions or industries.
Some industries require federal permits or licenses.
Therefore, the licenses and permits you need will be determined by the business type you want to operate.
So, you need to find all the required business permits and licenses needed to operate your business and get them.
Insure Your Business – What Is Sole Proprietorship in Business
As great as sole proprietorship businesses are, they come with some downsides.
One of them is the unlimited liability that makes you responsible for your business debts and liabilities.
To protect yourself, you can get your small business insured.
Insurance can help ease financial liability for unplanned accidents and incidents.
Open a Bank Account for Your Business
As a sole proprietor, you are not required to open a banking account for your business.
However, having a separate account for your business is highly beneficial.
It will help to keep the finances of your business organized.
You can identify your business operating cost and file taxes easily.
Furthermore, having an account for your business enables you to set up business credit and use the credit card payment method.
If you decide to grow or expand your business later on and need to get a loan, having a bank account for your business will make it easier.
Incorporating Sole Proprietorships – What Is Sole Proprietorship in Business
A sole proprietorship is an incorporated business.
The business owner isn’t separate from the business.
So the business owner is liable for the business debts and liabilities.
This scares several business owners among all the features of a sole proprietorship.
However, if you have a sole proprietorship and want to expand it, you might need to get incorporated.
Incorporating your business will protect your assets as your business identity will be legally separated from you, and you will get limited liability.
This way, you can make the expansion you want without the risk of losing personal assets.
A sole proprietorship can be incorporated as an S Corporation, C Corporation, or a Limited liability company.
These structures don’t provide the same level of protection.
Also, the process of becoming incorporated varies based on the business structure you are changing into.
For example, if you are changing to an LLC, you will need to draft and execute a limited liability company operating agreement.
But you won’t take this step when changing into an S Corps or C Corps.
So, when you decide to incorporate your proprietorship, research the processes for changing into each structure.
This will help you know the one that will work best for you.
Conclusion on What Is Sole Proprietorship in Business
Sole proprietorships are businesses that are established and owned by one person.
They are easy to establish and easy to end.
This business type has amazing benefits for a business owner, such as direct motivation, having all the business profits, better control, and so on.
Nonetheless, it also has some downsides, such as unlimited liability, limited capital, and size.
So, when opting to start a sole proprietorship, you need to be conscious of these downsides and work to ensure that they don’t cause unfixable harm to you or your business.
You don’t need to register your sole proprietorship.
However, if you want to protect yourself and your business and make it more professional, you must do certain things.
Finally, when you decide to incorporate your business, ensure that you know and follow the process.