Sole Proprietorship: The Business Entity You May Want to Form

Jul 14, 2013 by

The US federal government recognizes about 6 types of business organizations based on federal tax purposes; these are Sole Proprietorship, C-Corporation, S-Corporation, (General or Limited) Partnership, Trust and Non-profit. Each organization is designed to suit every entrepreneur’s specific needs, which include his/her intended type of service, future plans for growth and, most importantly, the type of limited liability protection desired (limited liability protection is one of the major considerations when it comes to a firm’s legal concerns. It limits the owner’s/shareholder’s amount of financial liability to the amount of capital he/she has invested, saving whatever personal assets he/she has).

Each type of organization has its own advantages and disadvantages, especially where profit, management and legal matters are concerned. One specific type of business organization is sole proprietorship, a type of firm that is owned and run by only one person. Sole proprietorship is the most widespread form of business entity in the United States, making up about 73% of all firms in the nation.

Advantages of Sole Proprietorship

  • Though the smallest form of business entity it can earn the highest profits and, since the business and its owner are taken as just one entity, one tax payment satisfies the federal tax law required
  • Sole proprietorship is also easy to start and much easier to manage (as there are no clashing of interests, which can happen when there are more owners)
  • It ensures faster and greater flexibility in making decisions
  • Whenever the owner decides to end operations, all he/she has to do is close shop and settle whatever bill needs to be paid.

Disadvantages of Sole Proprietorship

  • In a sole proprietorship, liability of the owner is unlimited, meaning, creditors can run after the owner’s personal assets, not just the capital he/she has invested, in payment of debts
  • Since there is only one owner, the amount of capital to start a business may, thus, be limited, affecting the stock inventory and number of qualified or competent employees needed to run the business efficiently
  • The owner may also have limited managerial skills, which can limit the firm’s growth, plus, the business is sure to end the moment the owner decides to sell it, quit or dies

An extraordinary set of skills is required to make the business grow and become a success. One definite good news for highly enthusiastic entrepreneurs, however, is that there are many lawyers who are experts in the area of business organization. With the help a business formation lawyer, you will be able to start and run your business right.

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