Sole Proprietorship
There are several forms of organization for a business; the most
common for small business is the sole proprietorship. In this
article we're going to define the sole proprietorship, and look
at the advantages of operating a business in this manner.
In the formation of a sole proprietorship, there is essentially
no separation of the business from the owner. There is no legal
separation of the business from the individual, and if you
operate a sole proprietorship, you are personally responsible
for the debts and liabilities of the business. Quite honestly,
it's the method chosen by the majority of business owners for
this reason: simplicity. There is no need for hiring a lawyer,
there's no need for corporate paperwork and fees, and you can be
in operation tomorrow, theoretically.
This is a continuation of the entrepreneurial spirit upon which
most businesses are founded anyway. The definition of
entrepreneur is one who initiates a new enterprise, assuming all
the financial risks associated herewith, and undertakes to
provide or control its management. The sole proprietorship form
of operation is simply a continuation of that risk-taking spirit
that inspires so many of us to take the leap into business
ownership.
The income of the business is reported with the individual's tax
return on the Schedule C, "Profit or Loss from Business" and is
attached and made a part of the personal tax return. Although
the business information is reported on a separate schedule, all
the profit or loss flows through to be reflected on the
individuals 1040 or 1040A. This is one of the advantages to
operating in this manner; the other advantages would be the
freedom to make any decisions the owner deems necessary, without
any further input, the flexibility that comes from individual
ownership, and the tax benefit that comes if the business shows
a loss; it directly affects the personal tax liability of the
owner.
What are some of the disadvantages? The biggest would be the
fact that the owner is the business, and as such is solely
responsible for debts, damages, liability, and operation. This
is known as unlimited liability. Other disadvantages are the
owner's difficulty in raising capital, and the continuation of
the business; if the current owner dies, then a new sole
proprietorship is formed, even if it is inherited by a relative.
As you can see, sometimes the disadvantages, once the business
has reached a certain size, might outweigh the advantages.
Is the sole proprietorship the best way to operate? In some
instances, yes. In others, the answer would be no. However,
there are several other options of organization formation, such
as the S Corporation, the C Corporation, the Partnership or the
Limited Liability Corporation; the catch here, is that all these
forms of business require the owner or owners to form a legal
basis for the business, and generally all members will want to
actively participate.
One of the great current incentives to operate a business as a
sole proprietorship today, and one in which there is growing
interest is the ability to establish certain tax exempt
retirement accounts, such as the SEP, or a Self Employed Pension
plan. Retirement accounts like these, allow the small business
owner to put away a large sum of money tax free, that might be
otherwise be treated as taxable profit income. This has been a
problematic situation for many of the nations self-employed: how
to safe for retirement, without having insurmountable taxes
levied on those savings. Well, today thanks to the creativity of
our law makers, and many business owners, the sole
proprietorship has several retirement options, that the owner
can make tax-free contributions each year to save for their
retirement.
Now that we've examined many of the advantages and disadvantages
of the sole proprietorship, and we've looked at the tax and
personal liability issues, we can close with one final thought:
the spirit with which many begin their business endeavors cannot
be organized into one form of operation, it simply chooses to
seize the moment. This is what continues to ensure the success
of the small business, in any form.