Why Are Sole Proprietorships the Most Common Form of Business Ownership?

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Why Are Sole Proprietorships the Most Common Form of Business Ownership?
Why Are Sole Proprietorships the Most Common Form of Business Ownership? (Image: Jeremy Slaughter: personal collection)

Sole proprietorships are the most common form of business, with more than 23 million tax returns filed from this type of business in 2007. This is because other business types, such as corporations and limited liability companies (LLCs), can add to the cost and maintenance of running a business. Consider the details of being a sole proprietor in the context of your type of business to determine if a sole proprietorship makes sense for you.

The Facts

Sole proprietorships are unincorporated businesses with one owner. As a sole proprietor, you are not distinguished from your business, which means you are your business from a legal and tax perspective. No formation documents or legal documents are required to do business as a sole proprietor, provided you are using your name. Choosing to use a trade name requires registration with the Secretary of State in your area. You also may be required to register or obtain a business license in your state.

Function

Sole proprietorships serve a large market of small businesses, especially home-based businesses. According to the Internal Revenue Service (IRS), the number of sole proprietorships is on the rise, increasing more than 4 percent from 2006 to 2007. Businesses of little complexity and nominal revenue appreciate the minimal effort required to maintain sole proprietorships.

Benefits

The ease and minimal cost of opening your business is one of the primary reasons for the sole proprietorship's popularity. You also maintain control and management of your company. Your sole proprietorship is limited to one owner by law, avoiding potentially sticky partner and shareholder disagreements. Sole proprietorships file a Schedule C with a Form 1040 individual tax return, reducing the cost of income tax preparation. Dissolving a sole proprietorship venture is easy and affords you the ability to operate several businesses without large legal, start-up and dissolution expenses.

Funding Issues

Sole proprietorships have little ability to raise capital with investors, though creative solutions exist to finance growth in your sole proprietorship. You are not limited to acquiring capital from investors. Banks finance sole proprietors with term loans, lines of credit and equipment financing. Keep in mind that banks require personal guarantees, and the approval process considers both you and your business. An equity line of credit on your home provides you with low interest rates and often has a higher limit than a bank line of credit for your business. Family and friends may provide loans with favorable terms as well.

Expert Insight

Businesses you start slowly or on the side are excellent candidates for sole proprietorship. A sole proprietorship can always be dissolved and formed as a limited liability company or a corporation. Businesses selling tangible products with low costs are prime candidates for sole proprietorship because of the minimal legal exposure. You must consider your product or service and determine whether legal liabilities exist. For more information on your specific situation, consult a local business attorney.

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