Why sole proprietorship is the best form of business

The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don't pay estimated tax each quarter, Uncle Sam can charge interest and impose penalties.

As long as you earn income in a given quarter, you owe tax for that quarter. You must pay federal income tax, along with Social Security and Medicare taxes, known collectively as self-employment tax. The income tax you pay is based on your adjusted gross income. Top shopping picks. Your business activities actually help establish your status.

However, you will have to apply and pay for any licenses and permits required by your city or state. Those requirements and costs can vary from region, state, and industry. The name must be unique and original and cannot already be in use by another business. For tax purposes, you and your business are viewed as one.

The business income is your personal income, so your business isn't taxed separately like with a corporation. As the sole owner, you benefit from what's called "pass-through taxation. To file taxes, you would report your operating results, including profit or loss, by submitting a Schedule C with your personal tax return.

What's more, you are not required to pay taxes on the full amount of your sole proprietorship's income. You only pay taxes on your business profits. An LLC can also offer similar tax treatment, with profits passing through to your personal tax return. There are downsides to a sole proprietorship, and they are big ones. Here are two major drawbacks that you should be aware of:.

Choosing the wrong structure can hamper your future success, so evaluate your objectives carefully and make the choice that works best for you. Before you lock yourself into a decision, it would be wise to see if an LLC or a limited partnership LP would be the better option for you. Contents 2 min read. Boni Peluso is an award-winning Creative Director and Content Strategist who has written extensively for the legal, heal… Read more.

Although this can certainly be considered one of the benefits of sole proprietorship, it can also be a notable disadvantage. As an example, LLCs offer protections that keep creditors from being able to seize your personal assets in most cases and prevent people from suing you personally for business-related issues.

Another disadvantage of sole proprietorship is that it can be harder to secure loans or financing than it is for other business entities. Plus, since all of the liability and backing from a sole proprietorship comes from a single owner, the business as a whole is reliant on that individual's initial investments, finances and credit history. Although as a sole proprietor, you may not be able to secure business financing from conventional lenders, you can still seek out personal loans to help fund your business.

Therefore, your business ends in the event of your death, or if you decide that you no longer want to run the company. If you wanted to pass your business down to an inheritor, you'd have to go through this same process. Therefore, although one of the advantages of sole proprietorship is singular ownership and control, this can also be a disadvantage, as it makes it much more complicated to sell your business if you eventually decide you want to do so.

A sole proprietor is the sole owner of an unincorporated business. This means that there is no legal distinction between the owner and his or her business. A sole proprietor only needs an EIN if he or she is hiring employees. Lastly, you should contact your city or county to inform them that you are now operating as an LLC.

When it comes to the advantages and disadvantages of sole proprietorship, many of the best benefits can also be the top drawbacks, it all depends on what will work for your business. If you're trying to decide if sole proprietorship is right for you, here's what you have to consider:. Do you want to set up your business quickly and easily, with less paperwork and registration fees? Do you want to have everything related to your business attached to you, as an individual, and under your control?

Do you not want to worry about other partners, investors, or even government regulations having a hand in your business?

If your answer to these questions is an overwhelming, "yes," then the advantages of sole proprietorship likely outweigh the disadvantages. However, before you make a final decision, it's always worth considering what the other entity types have to offer — and even consulting with a lawyer or online legal service for professional advice.

What are the advantages of a sole proprietorship? Less paperwork to get started. Fewer registration fees. Until then, take advantage of the freedom, ease, and affordability of the sole proprietorship structure.

For more tips on launching and scaling a startup, check out all our articles on Ideas by WeWork. This article was originally published on January 10, , and has been updated throughout by the editors. Previously, she was a journalist and editor at Mamamia in Sydney, Australia, and a contributing reporter at Gotham Gazette. Intrapreneurs can offer vital new ideas that push an organization forward. Get up to two months free on select dedicated workspace, plus a special offer on hybrid solutions.

Select markets. Terms apply. Learn More. What are the advantages and disadvantages of sole proprietorship? A simple, flexible way to scale operations, sole proprietorship comes with many benefits—but there are risks associated, too By Caitlin Bishop February 24, Plus, unlock a special offer on hybrid solutions.

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