Definition of the Word "Sole Proprietorship"
A sole proprietorship is a business owned and typically operated by one person who is responsible for all the debts. A host of managerial and financial issues goes along with this choice of ownership. When setting up a sole proprietorship, the businessperson needs to consider his immediate and long-range preferences.
Other People Are Reading
-
History
-
A belief in individual entrepreneurship has taken many forms. In the 17th and 18th centuries, the pioneer endured great hardships to succeed in operating a farm or a small business. In the 19th and 20th centuries, the homestead farmer symbolized the ideals of the economic individualist. As the nation grew, small merchants, independent artisans, and self-reliant professionals seized the opportunity to start their own businesses. In 2006 there were more than 23 million non-farm sole proprietorships in the United States, according to the U.S. Department of Treasury and the Internal Revenue Service.
Sole Proprietorship Credentials
-
A business operating as a sole proprietorship requires a license and registration if the business name is not the business owner’s name. For example, with John Smith as the sole proprietor, Smith’s Bakery does not require a registration. If the name is The Tasty Bakery, then a registration is in order.
When setting up a sole proprietorship in some states, for example Florida, it is not necessary to register with the state. However, if conducting business under a name other than your own, a fictitious-name search is required to check whether the name is already in use. In addition, you must advertise the fictitious name in a local newspaper in the county where the business will take place. The next step is to register the fictitious name with the Division of Corporations of the Secretary of State Office. If transactions involve sales and use tax, you must register with the Department of Revenue.
-
Advantages
-
The simplicity of the legal setup of a sole proprietorship proves attractive to small business entrepreneurs. The freedom and the flexibility in the management style, and not having to answer to anyone are strong reasons to choose this type of ownership. Typically, professionals, consultants and other business providers require a small amount of capital to operate a business in this fashion. A sole proprietor has the legal right to sell or give as a gift any asset of the business.
Tax Benefits
-
Another attractive feature is the tax benefits extended to businesses with the potential to suffer from losses in the early stages of their business. Tax laws permit the entrepreneur to treat sales revenues and operating expenses as part of personal finances. By deducting business losses from income earned from personal sources other than the business, a sole proprietor is able to reduce taxes.
Disadvantages
-
A sole proprietorship's personal liability is generally unlimited, and the business's assets and personal assets are subject to creditors' claims. Any existing liability is subject to collection upon the closing or the sale of the sole proprietorship. When operating a small business as a sole proprietorship, it is required that the business income and expenses be reported on the entrepreneur’s personal federal income tax return.
When a sole proprietor becomes disabled retires or dies, the sole proprietorship terminates. Because the sole proprietorship depends on one person’s resources and her managerial skills and finances might be limited, this can constrain the business. It is often very difficult for a sole proprietor to borrow money to start or expand their business.
-
References
- Photo Credit Business image by Poirot13 from Fotolia.com
