Why Are the Vast Majority of Small Businesses Started As Sole Proprietorships?

Small business classification

When a company is formed, it will be classified according to the needs of the owner(s) and based on the specific needs of business operations. A sole proprietorship is formed when one person registers her name for a company. The majority of small businesses start out as sole proprietorships.

Simplicity

The main reason a small business is classified as a sole proprietorship is by default. A business that is being operated by one manager or owner that is not specified as anything else will automatically be viewed as a sole proprietorship. A sole proprietorship can be formed as easily as the owner claiming the status and requires a limited amount of paperwork. The registration and processing fees are low, making it the cheapest form a business can take.

Tax Classification

The tax rate for a sole proprietorship is lower than that of other business classifications. The owner is not required to pay a business tax, and all taxes of the business are listed personally. A sole proprietorship owner should check with state requirements for specific information about registration and taxes. Additional requirements could include obtaining a federal employer ID number, zoning permit or professional license.

Future Options

A sole proprietorship leaves the door open to other options. A business can be started as a sole proprietorship by default or ease in the beginning but switch to incorporation as the business grows. If the owner hires more employees, the business's needs change or the management structure shifts, the business may be better suited under a different classification.

Advantages

A sole proprietorship is attractive to small-business owners because the owner has full decision-making power, which means decisions can be made quickly. A sole proprietorship can stay flexible and competitive compared to companies that have complex hierarchies. A sole proprietorship usually requires little startup capital; most can operate from the owner's home, which saves money on the initial investment.

Disadvantages

When a business owner is a sole proprietor, he is personally liable for the debt of the business, meaning creditors can go after him personally for debts. A sole proprietorship can have difficulty recruiting investors.

References

• Findlaw: How to Set Up a Sole Proprietorship