The simplest and most common business structure is the sole proprietorship. Businesses with this structure are typically smaller and have a single owner. Owners have complete control over the business and are completely responsible for all liabilities and obligations.
How are sole proprietorships formed?
Sole proprietorships are formed when an owner begins operating the business. Sole proprietorships are the easiest business structure to form and there is no additional costs or separate licenses to obtain. If a sole prop owner decides to hire an employee, they will need to apply for federal employer identification number, using Form SS-4.
Simplicity - The biggest advantage advantage that sole props have is their simplicity and ease of establishment. Sole props can also operate under the owners name, therefore it is not necessary to set up a separate name for the business. With less paperwork to file, the startup fees are also generally lower and less time consuming.
Complete ownership - With no partners or shareholders, the owner has complete ownership which allows complete control over business decisions. This leads to less time then having to get approval from partners or shareholders. The owner also makes decisions regarding costs and debts taken on by the company. Complete ownership also means the owner gets to enjoy 100% of the profits.
Easiest tax filing - Since sole proprietorships are not considered separate entities, there are no additional tax returns that need to be filed. While partnerships and s corporations have to file returns for the business, sole prop owners report the business income on their 1040 using Schedule C.
Unlimited liability - The main downside of the sole proprietorship is the unlimited liability it faces. Since the business is not considered a separate entity, the owner is liable for any liabilities and debts that the business faces. This could mean the loss of personal property in the worst scenarios.
Limited funding - Sole proprietors cannot sell stock to raise capital and will need to use their own savings when the business begins to grow and needs to expand. Lenders may also have more concerns when it comes to borrowing to a sole prop. This also ties into the unlimited liability factor, since owners will be completely responsible for debts taken on for the company.
Self employment taxes - Much like a partner, a sole proprietor is not considered an employee of his or her own business. Therefore, the owner is subject to paying the total costs of Social Security and Medicare taxes. This is of course, in addition to income taxes. Currently, the self-employment tax rate is 15.3%. Owners will need to make quarterly estimated payments on this tax in order to avoid penalties.
S corp Vs. Partnership Vs. Sole Proprietorship
To see how sole proprietorships stack up to partnerships and s corporations, take a look at this article: http://help.halontax.com/bookkeeping-help-and-more/taxes/s-corporation-vs-partnership-vs-sole-proprietorship