What is a sole proprietorship business? Definition, examples, benefits

“There is a difference in legal liability when I am a sole proprietor versus my running a corporation. When something goes wrong as a sole proprietor, the liabilities are on me as the business owner. A sole proprietorship is informal and easily created, which is why it is the most common structure chosen by new businesses. Sole proprietorship is one of the three most common ways of organizing a business in Canada.

1. Sole proprietorships and partnerships are suitable for small businesses, while LLCs and corporations are ideal for larger businesses that want to protect their owners’ personal assets.
2. Anyone who operates a business is a sole proprietor until they incorporate a company.
3. LLCs that are classified as S-corps enjoy extra benefits relative to partnerships and LLCs that are disregarded entities.
4. These are just a few examples, and the beauty of sole proprietorships is their versatility.
5. Alex is a freelance writer who provides customers with blog posts, website copy, and marketing materials.

Limited Growth Potential

If you are wondering what type of business is a sole proprietorship, you may be surprised at some common examples. It is easy to understand what determines if a business is a sole proprietorship. Kate Schade started her company, Kate’s Real Food, as a sole proprietor.

You can do this by filing with your local secretary of state or county clerk’s office. For more expertise, you’d need to hire employees across all business areas—which can get expensive. Or, seek help from external agencies who may be good but lack the passion you need.

A fulsome business plan helps proprietors determine the capital necessary to start up, sustain, and grow the business. While some proprietors have employees and delegate some of their authority, they are ultimately accountable for all the decisions and acts of their business. You’ve taken your time creating a business plan that will help you succeed and you’ve likely trained or learned a lot about the business of being in business.

1. Flexibility and ease of management make such business options exceptionally attractive to those businesses that require small startup capital and also less burdensome regulatory requirements.
2. Once you’ve decided on your business and created a business plan, you can establish your sole proprietorship by following these essential steps.
3. Partnerships, on the other hand, share similarities with sole proprietorships but require agreements between the individuals who share management and profits.
4. If the business can’t pay its debt, the creditors can take action against any business owner.³ Forming a partnership can help take your growth to the next level.
5. This means they avoid the expensive accounting and regulatory fees that businesses with other structures must pay.
6. A sole proprietorship is a business framework in which you possess complete ownership and control.
7. That deduction can result in huge savings and runs until Jan. 1, 2026—unless extended by Congress.

In addition, you must file an annual tax return with the IRS and pay any applicable self-employment taxes. You may also need to collect and remit sales tax if you sell physical products or provide certain services subject to your state’s sales tax. Therefore, keeping detailed records of your business income and expenses is important to report your tax liability and minimize your tax burden accurately. Personal trainers often operate as sole proprietorships because individual sessions allow them to work with multiple clients simultaneously and set their own rates based on the type of service offered. Being a sole proprietor or a personal trainer can provide independence and financial rewards. However, it also carries risks due to potential injuries incurred during physical activities.

The only difference is that while a sole proprietor focuses on running their own business, a self-employed person focuses on their skillset, offering them for limited times. They are independent contractors, so they do not provide their services just to one business. Target a small area where you may pitch your service – your neighborhood, for example. If you register the business structure as a sole proprietorship, then you should be able to get tax deductions for the tools you use. Jordan is a licensed plumber who operates a business that provides plumbing repairs, installations, and maintenance for residential and commercial customers.

Systematically Build Your Startup 3-5x Faster

Consult with your attorney or certified public accountant (CPA) to ensure you choose the best business structure for your company goals. Making regular payments can help a proprietor keep their tax burden from becoming overwhelming and incurring tax penalties. Tax advisors can help proprietors estimate taxes so they can set aside enough of the profits to make mandatory government payments2. Proprietors must pay individual taxes on the income periodically, for example, as part of the annual individual tax filing.

Once you’ve established your business, consider using work management software like Connecteam to run it effectively and stay compliant with the law. Consider consulting with a tax advisor for guidance on which taxes apply to your business so you don’t make any mistakes. The owner’s ability to use their own time to earn greater profits to offset the cost of hiring help is a crucial consideration. The proprietor must make “good enough” decisions in all business areas. If an owner does not have enough knowledge or skills, their decisions may be flawed. There is a finite amount of time to do things correctly or learn to do everything adequately.

Understanding Sole Proprietorship: Key Features, Benefits & Risks

It is owned, operated, and managed by one individual, having full control over its business, and is entitled to all the profits generated by the business. However, the owner risks all and bears the liabilities of the business. Some other attractions of sole proprietorship examples the sole proprietorship are the ease of setting up, minimal regulatory requirements, and full control over the business.

However, they come with more complex regulations and tax requirements. Partnerships, on the other hand, share similarities with sole proprietorships but require agreements between the individuals who share management and profits. An important downside of a sole proprietorship is that it provides no liability protection to the owner. By contrast, an LLC separates business and personal assets and the owner is protected against creditors seizing their assets, such as their home.

Your personal assets are at risk if the business faces financial obligations it can’t meet. Let’s say you run a small construction company and a client sues you for damages. Your home, personal savings, and other assets could be seized if the business can’t cover the legal costs.

It can be difficult for individuals to manage all aspects of their business properly. The owner can hire employees, outside help, or get professional advice on parts of the business process. If the business cannot satisfy its obligations, creditors may pursue the proprietor’s personal assets in order to be repaid. If you’re ready to open a retail shop with less paperwork, a flexible schedule, and fewer administrative hurdles, sole proprietorship is right for you.

Taxation

If the business generates a loss, for instance, that loss can be applied to reduce income gained from other sources. However, sole proprietorships have a downside in that the proprietor is personally liable for all functions and debts of the business. Registration of a business name for a sole proprietor is generally uncomplicated, unless it involves the selection of a name that is fictitious, or assumed. In many countries, the business owner is required to register with the appropriate local authorities, who will determine that the name submitted is not duplicated by another business entity.