A sole proprietorship is an entity a business can opt to be formed as; it is often regarded as the simplest entity type. It’s an extremely popular option for startups in various industries, and has been regarded as by far the most common business entity in the US for a while now. Today, there are 23 million sole proprietorships, which is greater than all other business entity types combined.
No form of state registration is required for this informal business type; though there are still some general guidelines that must be adhered to when operating this business form. This article will discuss why a sole proprietorship is chosen and how to become in an effort to answer the question of why it is the most popular business entity of 2021.
Why Choose A Sole Proprietorship?
A sole proprietorship is almost identical to a general partnership, the main difference being that it operates with a single owner rather than multiple. Just like a general partnership, there are few legal requirements to becoming a sole proprietor, which is why it’s the easiest business type to form.
A sole proprietorship will commence its existence as soon as its owner begins working; in the eyes of the law, the owner and their business are synonymous. One of the main reasons it’s so popular is because it’s a good point from which to create a business since the startup costs are next to nonexistent, and it can be easily converted to any other entity in the future.
Other advantages to choosing this business formation include the ability for the owner to maintain full control of their company. Additionally, it’s also extremely cheap and easy to assemble and government oversight is nominal compared to other forms (especially corporations or LLCs).
Further, unlike LLCs and corporations, sole proprietors are not required to appoint a registered agent; this is someone who acts as the company’s receiver of important documents from the state. Sole proprietors can forego this necessity of the other formations, though can choose to hire a registered agent if they so desire.
How Do Sole Proprietorships Work?
Taxes for this business entity formation are extremely simple; ‘business taxes’ as they are traditionally understood do not have to be paid – the sole proprietor pays their personal income tax rates across their business and personal incomes. The reason for this is sole proprietorships are not considered distinct from their owners.
Moreover, taxes are paid on business profits but they are not declared separately; they must be reported on your personal income tax return under Schedule C. In addition to this, sole proprietors are also liable to pay self-employment taxes. These would normally be handled by someone’s employer from the employee’s paycheck, but the situation becomes more convoluted if you are the employer.
Since there is no corporate veil in sole proprietorships, they offer no legal protection as they are indistinguishable from the owner. Moreover, there is no distinction between business and personal finances as with LLCs. This is arguably the greatest drawback of this business entity: just one single liability claim could prove calamitous if the business remains unincorporated.
On top of this, sole proprietorships do not have exclusive rights to the business name they are currently using; they can only acquire DBA (‘doing business as’) names. Furthermore, since there is no exclusivity surrounding DBA names, other companies are free to assume the name of a sole proprietorship if they desire.
On balance, the popularity of sole proprietorships is fairly unsurprising when their qualities are considered equitably. The ease and inexpensiveness of their setup is undeniably attractive to first-time entrepreneurs looking to get their startup going. Its informality means that no form of registration is required with the state government, which is perfect for many.
That being said, the benefits of sole proprietorships are equivalent to their costs in comparison with the other entity types: rather minor. None of the liability protection or tax benefits in present other business entity types can be found here; if these are of interest to you, these entities should be considered despite the higher cost and effort associated with their startup.
For more information regarding how to form a sole proprietorship, or other general information surrounding this business entity, please refer to IncorporationRocket’s extremely helpful and detailed resource on the topic.