Will it still be a business of one? Growing your small business will require cash to take advantage of new markets and more opportunities. An unrelated investor has less peace of mind concerning the use and security of his or her investment, and the investment is more difficult to formalize; other types of business entities have more documentation. Outside investors will take your company more serious if you are a corporation.
Privacy Policy. Skip to main content. Types of Business Ownership. Search for:. Sole Proprietorships. A Brief Definition of Sole Proprietorships A sole proprietorship is owned and run by one individual who receives all profits and has unlimited responsibility for all losses and debts. Learning Objectives Define a sole proprietorship. Key Takeaways Key Points In a sole proprietorship, there is no legal distinction between the individual and the business.
Thus, every asset is owned by the proprietor, and they have unlimited liability. Key Terms Sole Proprietorship : a business that is wholly owned by a single person, who has unlimited liability.
Advantages of Sole Proprietorships The advantages of a sole proprietorship versus other forms of organizations is the relative ease of set-up and the lower start-up costs.
Learning Objectives Discuss the advantages of running a sole proprietorship. Key Takeaways Key Points Filing taxes as a sole proprietorship is relatively easier than that of a corporation. As a sole proprietor, you must also file a Schedule SE with Form You use Schedule SE to calculate how much self-employment tax you owe.
You need not pay unemployment tax on yourself, although you must pay unemployment tax on any employees of the business. Of course, you won't enjoy unemployment benefits should the business suffer. Sole proprietors are personally liable for all debts of a sole proprietorship business.
Let's examine this more closely because the potential liability can be alarming. Assume that a sole proprietor borrows money to operate but the business loses its major customer, goes out of business, and is unable to repay the loan.
The sole proprietor is liable for the amount of the loan, which can potentially consume all her personal assets. Imagine an even worse scenario: The sole proprietor or even one her employees is involved in a business-related accident in which someone is injured or killed.
The resulting negligence case can be brought against the sole proprietor owner and against her personal assets, such as her bank account, her retirement accounts, and even her home. Consider the preceding paragraphs carefully before selecting a sole proprietorship as your business form.
Before it became eBay , the online trading platform was a sole proprietorship owned by Pierre Omidyar and operated under the business name Auction Web.
And sole proprietorships are commonly used by entrepreneurs as a stepping stone to opening an LLC or a corporation. As with any business structure, there are disadvantages to sole proprietorships as well.
Here, we look into the two biggest risks—liability and difficulty raising capital. The same way sole proprietorships afford you the freedom to operate as you see fit—adhering only to licensing mandates without registration or shareholders—this freedom comes with responsibility. As a sole proprietor, you are personally liable for paying contractors, honoring debts, paying the necessary taxes and insurance for your employees, and any legal contingencies.
If your sole proprietorship is sued for malpractice or bankruptcy, for example, your personal assets including your home, cars, and bank accounts can be seized to cover these expenses. The personal liability of a sole proprietor represents risk and, for this reason, banks can be hesitant to lend money or issue credit under this business structure.
Consider alternative financing options, like bootstrapping and crowdfunding, at the outset. Bootstrapping a business is relying on personal savings or company sales for funding, rather than outside investors. Crowdfunding, on the other hand, is financing a business through many small donations or investments through a platform like Kickstarter or Indiegogo. Adriana Vazquez did market research before launching a Kickstarter for her company Lilu , which makes an innovative breast pumping bra.
With so much to consider in building a business —including writing a business plan, raising capital, staying inspired, and knowing when to invest full-time in your startup dream—the ease of sole proprietorship can feel like a relief. You can begin work without formal registration, and there are minimal upfront costs involved in securing your business name and the appropriate licenses.
Yet be sure to do your homework when you begin to take advantage of the ease of launching a sole proprietorship. Eiko Nakazawa, the founder of early childhood education startup Dearest. Not only are these helpful for you to plan the next steps, but also useful for you to understand potential pitfalls and challenges. As you move through the startup phase, coworking spaces like WeWork can also provide support, giving you access to a global community of business leaders and offering flexible monthly leasing agreements.
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Develop and improve products. List of Partners vendors. By Jean Murray. Learn about our editorial policies. All sole proprietors are self-employed but not all self-employed people are sole proprietors.
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