If you are considering becoming a business owner, one option to consider is being a sole proprietor. Being a sole proprietor allows you to be your own boss by controlling the operations of your own small business and enables you to benefit from all of its profits.
This type of business has very few start-up costs and operational hurdles. If that sounds appealing, then let’s dive into what it means to become a sole proprietor.
What is a Sole Proprietor?
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A sole proprietor is an individual who owns an unincorporated business that is not registered as a corporation or limited liability company. It is the simplest form of business structure, and one person serves as both the owner and the operator of the business.
A sole proprietor has complete control over all aspects of their business, such as decision-making and profit distribution, and is responsible for any debts or legal action taken against the business.
An Example of a Sole Proprietorship
In this example, John is a freelance web developer who works out of his home office. He has never registered his business as an LLC or corporation and pays taxes on his business income as a sole proprietor.
He has full control over his operations, including how much he charges for services, what projects he takes on, and how he markets himself. He is also legally responsible for any debts or legal action taken against his business.
Sole Proprietorship Vs. LLC
When discussing a sole proprietor vs LLC, there are several differences to consider before deciding which type of business structure is best for you. Let’s have a look…
Sole Proprietor Vs. Owner
As shown below, there are many similarities and only a couple of differences between a sole proprietor and an individual owner who has not registered their company as an LLC or corporation.
Sole proprietorships offer many benefits to those considering starting their own business. Here are five advantages of a sole proprietorship:
- Low startup costs. Becoming a sole proprietor has low start-up costs as there are very few legal and administrative fees associated with setting up the business.
- Flexibility. As a sole proprietor, you have complete control over your business and can make decisions quickly without having to consult with a board of directors or other partners.
- Tax treatment. Sole proprietors are only taxed on the profits they generate and may be able to include some of their business expenses as tax deductions, such as mileage or office supplies.
- Simplicity. As a sole proprietor, there is less paperwork that needs to be filed with the state in order to get up and running.
- Privacy. As a sole proprietor, your business is not registered with the state and therefore any financial information associated with it is private.
Disadvantages of a Sole Proprietorship Business Structure
While there are many advantages to being a sole proprietor, it also comes with many drawbacks. Here are four disadvantages of a sole proprietorship:
Learning how to start a business as a sole proprietor is relatively simple. In addition to checking out our business startup checklist, follow these steps to get your sole proprietorship up and running:
Step 1: Choose a business name.
When starting a business, you must choose a name that is not used by another registered business. Check the Secretary of State’s website or the local county clerk’s office to make sure the name you want is available.
Step 2: Obtain any necessary permits, licenses, and tax IDs.
Depending on your business and the state where you are located, you may need to obtain a permit or license in order to legally operate. In addition, all businesses must obtain a Federal Tax ID (EIN).
Having a separate bank account for your business allows you to keep your personal and business finances separate.
Step 4: Consider purchasing business insurance.
Although it’s not required, having business insurance can provide protection for your business in case of accidents or lawsuits.
How do you File Taxes as a Sole Proprietor?
Anyone who owns their own business and operates as a sole proprietor must treat business income like any other income they have earned. Generally speaking, business income earned by a sole proprietor should be reported on their personal tax return and is subject to normal business taxes.
Taking advantage of business tax deductions can help decrease your business income and your total overall tax bill.
What taxes do sole proprietors pay?
The taxes that sole proprietors must pay can vary, depending on the type of business they own and where it’s located. In general, sole proprietors must pay the following taxes:
For small business owners, making the move from sole proprietor to LLC is a key milestone in the life of their business. Creating a business entity to operate under provides owners with greater personal liability protection and tax advantages.
To make this move, you’ll need to register your business with the state, create an operating agreement, obtain any necessary permits and licenses, and transfer any existing business assets.
Is a Sole Proprietorship right for you?
Have you ever thought of starting your own solopreneur business? A sole proprietorship could be the right option for you. There are so many solopreneur business ideas out there from web design to freelance writing, and as a solopreneur, you have the creative freedom to pursue your passions without relying on anyone else’s opinion.
A sole proprietorship could be for you if you’re looking to start a business with minimal cost and paperwork, while still having some degree of personal liability protection.
Is sole proprietor the same as self-employed?
No, a sole proprietorship and self-employed are not the same thing. A sole proprietor is an individual who owns and operates a business without any formal organization.
A self-employed individual is someone who works for themselves and receives income from their business activities but doesn’t necessarily own a business. While a sole proprietor must register their business with the state, self-employed individuals do not need to do this.
Do sole proprietors pay income tax?
Yes, sole proprietors must pay income taxes on any business profits they make. They should also report any self-employment income on their personal tax return.
In addition to income taxes, sole proprietors may also need to pay other taxes such as sales tax, property tax, and self-employment tax. It’s important to research the various taxes that may be applicable to your business and make sure they are being paid properly.
Learning how to pay yourself as a business owner is an important factor to consider when setting up a business as a sole proprietor.
While business owners cannot pay themselves an employee salary, they can pay themselves distributions from their business profits as long draws or dividends. The amount of these payments can vary, depending on the business’s financial situation and the owner’s personal needs.
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