The definition of a sole proprietorship is essentially a business that is run by one person and owned by that person as well. Specifically, a sole proprietorship is separated from the other business entities because of the specific legal dynamics between the business and the owner of the business. Moreover, because of this factor, sole proprietorships are usually easy to both form, maintain as well as dissolve if need be. In a New York Times article, the authors expressed that small businesses are typically sole proprietorships and as such, this is why it was selected as the business entity (1). Furthermore, the aforementioned reasons allowed for a rather rapid decision on the basis that with this entity, there is an ability of the owner to run it how they see fit.
Sole proprietors because they are the owners, do not have to pay business taxes, however, the owner must pay taxes on the income that is collected from the business as a part of his or her own personal income taxes. Despite the fact that the business is owned and run by the sole proprietor, there is a definitive need to comply with any licensing requirements in the particular state where the owner is doing business. This includes zoning ordinances, local regulations as well as the necessary paperwork attributed to the business running smoothly. There is a nominal amount of paperwork associated with the sole proprietorship in comparison to the other types of business entities, which makes it an even more attractive business to operate ("Advantages and Disadvantages of Sole Proprietorships").
There are several advantages and disadvantages to the sole proprietorship. The advantages of a sole proprietorship based on the article in the New York Times include:
A sole proprietor has complete control and decision making power over the business
Sale or transfer can take place at the discretion of the sole proprietor
No corporate tax payments
Minimal legal costs to forming a sole proprietorship
Few formal business requirements (1).
The disadvantages associated with the sole proprietorship are that: "the sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, the risk extends to any liabilities incurred as a result of acts committed by employees of the company, [and] all responsibilities and business decisions fall on the shoulders of the sole proprietor" ("Advantages and Disadvantages of Sole Proprietorships").
In order to have a sole proprietorship, there are pertinent documents that are needed. Blunt (2013) asserts that the documents depend on the type of sole proprietorship that is being opened. If the business will be a service business solely, then there is a registration form that must be filled out. Additionally, some states require sole proprietors to register with a county clerk's office. The necessary identification will be needed in order to do this. If the business is a service-oriented business that will have employees, then the sole proprietor must also obtain an Employer Identification Number. If the business is going to sell products, then there are documents needed regarding that as well as a seller's permit that the sole proprietor will have to fill out. Also, if it is a restaurant, then the sole proprietorship will need to have all of the documents associated with the business entity and a food service license that is typically obtained from the state's local health department (1). The sole proprietorship can be quite an interesting entity to take on and it is usually the preferred one over the others. The other business entities are: a limited liability company, a corporation and a partnership.
A limited liability company also referred to as an LLC is a type of business structure where the owners are known as members. There are typically several partners associated with the LLC. LLC's tend to have a different type of tax classification per IRS guidelines for tax reporting purposes. Usually, the Internal Revenue Service treats an LLC as a partnership, or a corporation or rather ask the LLC to identify itself as such on the tax return ("IRS"). There are a few advantages with LLC's that include a nominal amount of record-keeping and profit-sharing that is allowed. This makes LLC's attractive, however, they are not more attractive than sole proprietorships because of the disadvantages.
The disadvantages of an LLC include limited life, which means that the business can abruptly end if certain obligations are not adequately and sufficiently fulfilled. As is often the case with small businesses in America, there also self-employment taxes that come with LLC's where the members have to pay tax contributions toward both SSI and Medicare ("SBA"). Thus, the sole proprietorship is still the most attractive option when examined against the LLC.
There are typically two types of corporations: C corporations and S corporations. A-C corporation is denoted as an intricate business structure due to the myriad of costs and tax requirements that accompany its formation. Just as there are advantages and disadvantages to the other aforementioned business entities, there are pros and cons to the C corporation. According to SBA.gov, the advantages of a C corporation are that there is limited liability, which translates to mean that the personal assists of the shareholder are protected. In addition to this, the corporation receives tax treatment on a corporate level, meaning that it pays separate taxes from the owners. Also, C corporations are very attractive to employees because of the many benefits that tend to come with being employed by a corporation such as stock options and perks (1). There are also disadvantages that do not outweigh the selected business entity of the sole proprietorship.
The disadvantages of a corporation, both C and S types are that they take a considerable amount of money and time to set up. In essence, they are costly ventures and funding strategies can take up a significant amount of time and resources. There is also an enormous amount of paperwork required. The main distinction between a C and S type corporation is that the S corporation is a special type that is enacted through tax election via the Internal Revenue Service. Corporations that are set up as S types can avoid being taxed double if they a set up under this type (“SBA”). Finally, there are partnership entities.
A partnership is defined or rather expressed as a business where two or more individuals share the ownership of it. Each respective partner has a say-so in the aspects of the business as far as the labor, property, money, and skills and in return, the partners within the partnership partake in both the revenue and the losses that occur from the business ("SBA"). There are both advantages and disadvantages of the partnership. According to SBA.gov, the advantages of a partnership are that they are relatively inexpensive and easy to establish, that the individuals within the partnership usually have similar skills and expertise and that there are incentives that come with partnerships (1). This makes it much more impactful and attractive to have a partnership. However, there are disadvantages that have to be looked at as well and when they are, the sole proprietorship still becomes the best one to select in the end.
The disadvantages of a partnership are the shared profit factor, which can cause a lot of animosity among the partners if things do not go as well or if there is an unequal amount of contribution among the partners. Additionally, there is both individual and joint liability with partnerships. This can often cause dissension between the partners (“SBA”). Essentially, the sole proprietorship is the best choice because the risks are minimal because it is solely one individual, who can make the best choices and decisions and deal with the consequences that arise accordingly.
"Advantages and Disadvantages of Sole Proprietorships ." New York Times 5 June 2007: Web. 6 Dec. 2013. <http://www.nytimes.com/allbusiness/AB4113314_primary.html>.
Blunt, Lanee'. "What Are the Key Documents Needed for a Sole Proprietorship?." The Houston Chronicle, 2013. Web. 7 Dec. 2013. <http://smallbusiness.chron.com/key-documents-needed-sole-proprietorship-15300.html>.
"IRS." Internal Revenue Service, 2013. Web. 7 Dec. 2013. <http://www.irs.gov/>.
"SBA." U.S. Small Business Administration, 2013. Web. 7 Dec. 2013. <http://www.sba.gov/>.