Choosing the right business structure is one of the hardest decisions a new entrepreneur has to make.
A Sole Proprietorship is great for a small business and LLCs are the popular choice for mid-sized businesses. Some people prefer Corporations as they’re the easiest to scale and grow the business.
Given that most new businesses start small, Sole Proprietorships are probably the safest option to start with.
What exactly is a Sole Proprietorship?
It is a business structure where the owner is solely responsible for the operations, profits, and financial liabilities of the business. It’s not a legal entity separate from the owner but is linked to the owner.
What makes a Sole Proprietorship great for your new business?
That’s what you’ll learn in this post, so keep reading.
1. It’s Easy to Form and Operate
When you set up a Sole Proprietorship, the process is simple and straightforward. The level of documentation required is much less than that for forming LLCs or Corporations.
LLCs, for example, require LLC operating agreements and Corporations require articles of incorporation. You also need to find and hire a registered agent service for your business.
For starting start a Sole Proprietorship, you don’t have to do any of that.
Unlike an LLC or a Corporation, a Sole Proprietorship is not a separate legal entity. This reduces the number of steps required to register your business with the authorities.
You simply need to apply for an employer identification number (EIN) in your name or under a doing business as (DBA) name and you’re done.
2. You Get All the Business Profits
As a Sole Proprietor, you are entitled to all the business profits—no need to share these with other partners or members. This is one of the biggest reasons why entrepreneurs choose Sole Proprietorship for a new business.
Additionally, you can also avoid paying corporate taxes and can simply get your business profits taxed as part of your personal income. This reduces the tax burden faced by Corporations and further adds money to your pocket.
You should, however, remember that you will also have to bear the losses. Given the benefits offered by this business structure, it’s still worth the risk.
3. It Offers Complete Administrative Control
One of the most important reasons why a Sole Proprietorship is good for business is that it offers complete control over day-to-day operations.
As a sole proprietor, you decide how you want to run your business. There are no partners, thus, no chances of conflict on how to run things. You will take all the business decisions and reap all the benefits.
In that sense, a Sole Proprietorship is great for business as it offers a lot of flexibility and control to the owner. If you want to be your own boss and don’t want to answer to anyone, this is the best option for your business.
4. Sole Proprietorships Have Low Startup Costs
As a new entrepreneur, you may have a tight budget to start your new business.
If you decide to start an LLC or a Corporation, you’ll need to pay filing fees that differs from state to state. This can start from $50 and go as high as $800, depending on the state.
For a Sole Proprietorship the startup costs are extremely low.
Some states also require businesses to pay an annual fee to maintain their registration and good standign with the state. This is another cost that you can avoid if you choose a Sole Proprietorship to start your business.
The overall operational and ongoing charges are also lower for a Sole Proprietorship compared to any other business entity. If you have a small budget to start a business, then Sole Proprietorship is the best option.
5. It’s Easy to Change Business Structure Later
While Sole Proprietorships are great to start a small business, they are not the best option for scaling your business.
Why should you start a Sole Proprietorship then?
Because it is easy to start with and then upgrade to a different business structure. You can easily change your business to an LLC or Corporation by completing some legal formalities.
Given that Sole Proprietorships are not separate legal entities, the process for switching to another business entity is straightforward. You need to register your business with the state and complete the documentation related to your chosen business structure.
For example, you will need to draft an LLC operating agreement if you want to start an LLC.
Ready to Set Up a Sole Proprietorship for Your Business?
For starting a new business, Sole Proprietorships are the safest bet. They’re quick, easy, and cheap to start with and you can always switch to an LLC or Corporation later.
Remember, while it does have its advantages, there are some drawbacks as well. For example, you will be personally liable for business losses. It’s not easy to get funding for Sole Proprietorships and that makes it difficult to scale the business.
Keep these in mind when choosing a Sole Proprietorship for your business. Good luck!
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
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