The most basic business structure that exists is known as a sole proprietorship. Even though there are many business structures out there that come with their own unique advantages, operating a sole proprietorship can work well for the right businesspeople, especially in the initial stages of doing business. Bert Seither, who works with small business owners in all walks of life, explains some of the benefits of operating such a business.
Like its name implies, a sole proprietorship generally involves just one individual doing business on their own. Because of this, a sole proprietorship is considered the most basic type of entity to set up, in addition to being the least expensive. Other than any licenses, certifications, or permits that may be required to do business, there is really no formal registration required to run a sole proprietorship. In reality, many individuals are considered sole proprietors without even knowing they have this designation. These can be nice advantages since sole proprietors can avoid having to pay any registration fees at the state or federal levels, and they don’t have to deal with the often endless amounts of paperwork that have to be filled out when establishing other types of entities.
Bert Seither says that sole proprietors have plenty of control over their businesses. You can make all of the decisions on what your company does, from the initial startup phase to everything about how it is maintained. You don’t have to worry about other individuals who may wish to change certain facets of the company. If you have lots of confidence in your abilities as a small business owner, there may be no reason to have a business partner or any employees, although there can be employees involved in such a business in some instances. Additionally, there are limited government rules and regulations that apply to sole proprietorships. They are also very appealing to some because they aren’t required to hold annual meetings, and sole proprietors do not have to be U.S. residents or citizens. This is a great benefit for non-U.S. residents who wish to operate their own businesses.
Sole proprietorships are different from other business structures because they aren’t taxed at the corporate level as separate entities. As such, taxes on them are fairly easy to understand and fulfill for the IRS. Sole proprietors simply report their business-related profits, losses, deductions, and other activities right on their personal income tax returns. No special returns have to be filed with the IRS. This tax structure is viewed as the most basic among all types of business entities, making it very attractive to operate for certain business owners.
Although sole proprietorships work well for many business owners, Bert Seither warns that there are some things to consider before choosing this option. Sole proprietors are on the hook for a 15.3% self-employment tax and generally endure higher audit rates than owners of corporations and LLCs. These other structures are also more formal in nature. However, it’s extremely important to look at a potential business with a big-picture perspective to make the most appropriate decision.