Organizational Structure of Sole Proprietorship

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New businesses are often started by one person with a dream and a skill. Service businesses are popular among individuals who've worked in a corporate environment for an extended time and decide to take control of their career. Craftsmen who can create their own hand-made products also often operate their own businesses. There are many options for starting your own business. A sole proprietorship is one of the easiest businesses to start on your own.

Defined

  • A business owned and operated by one person is a sole proprietorship. It is unincorporated, which means the owner takes on all legal liabilities and risks personally that the business may endure. In a corporation, if one board members dies, the business continues with new members. In a sole proprietorship, if the owner dies, the business ceases to exist. She is solely responsible for the business.

Advantages

  • A sole proprietorship is the simplest option for getting the business started without waiting for all elements to fall in place. No lawyers are needed. The Idaho Small Business Development Center website says that "A sole proprietorship can be established, modified, bought, sold, or terminated very quickly." When a sole proprietor is ready to expand, the proprietorship can easily be converted to a different type of business entity. The involvement of family members is generally unrestricted, which opens the door to survival of the business without the founder.

Limitations

  • Sole proprietors find it hard to raise venture capital, which can stunt the growth of the business. When the business grows, so does the risk. Illinois attorney James L. Poznak advises that "The principle disadvantage of sole proprietorships is that you, the sole proprietor, are personally liable for all the debts of your sole proprietorship." Sole proprietors often pay higher taxes because of the added expense of self-employment tax as well as incurring additional tax burdens if their income pushes them into higher tax brackets.

Ideal Businesses

  • Businesses that are ideal for sole proprietorship are service proprietorships such as consultants, writers, computer technicians and others with talents that consumers often can't do on their own. Service providers such as lawyers and accountants whose expertise has legal ramifications should opt for registering as a limited liability company or other business entity that reduces their liability if the customer isn't happy with the services.

Formation

  • The IRS identifies anyone operating a business that isn't incorporated as a sole proprietorship. Some states don't require sole proprietorships to get business licenses; however, it is advisable to register a fictitious business name with the local municipality. Also, to make it easier to track business expenses from personal expenses, a secondary bank account should be opened.

References

  • Photo Credit business image by peter Hires Images from Fotolia.com
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