About Sole Proprietorships
A sole proprietorship is a business which has one owner and legally is not considered separate from the owner. Most small businesses begin as sole proprietorships and many stay that way for decades. Since most people just start a small business one day without any formalities, such as your neighbor who plows snow for local businesses, they become a sole proprietorship by default. Other types of organizational structures include partnerships, limited liability companies, and incorporated companies.
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Advantages
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A sole proprietorship is the simplest of all business legal structures. The individual reports income, profit and losses on the individual tax return. There are no Internal Revenue Service fees or other federal fees, although the state may require the owner to file a form and pay a fee reporting the name of the business. However, people using their own names as the business name usually do not need to do that, unless they are in licensed occupations such as a physician or attorney. Otherwise, no paperwork is required to create a sole proprietorship, unlike the other business structures. A sole proprietorship can hire employees and independent contractors like any other business.
Disadvantages
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Because the business is inseparable from the owner, the owner is liable to any potential creditors and may have to use his own personal assets to make payments. This can include money from bank accounts or having to take equity from the home. Sole proprietorship owners may find it difficult to raise money for the business, and then may have to borrow from relatives or friends, or against personal assets. Also, liability is unlimited if someone successfully sues the business, unlike a limited liability company or a corporation.
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Features
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The number of sole proprietorships in the United States is growing. Individuals filing the tax Schedule C which lists profit and loss from a sole proprietorship business increased from 1 in 10 to nearly 1 in 6 between 1980 and 2005, according to a 2008 article in the National Tax Journal.
Considerations
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According to the 2001 National Research Program, sole proprietorships are the largest single contributor to under-reported individual taxable income, representing about $68 billion in that year alone. Sole proprietors as a whole also have a large dollar amount of unpaid taxes.
Types
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About 21 million Schedule C forms were filed in 2005, representing a wide variety of self-employment work. These business owners include day care center operators, veterinarians, house painters, eBay sellers and other online retailers, construction workers, freelance writers and photographers, hairstylists, life coaches, psychics and a multitude of others.
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