The main benefits of a sole proprietorship are the pass-through tax advantage, the ease of creation, and the low fees for creation and maintenance. Yes, being a sole proprietor is the same as being self-employed. A sole proprietor does not work for any company or boss, so they are self-employed. However, as the business grows, it may make sense to transition into a different legal structure. After the paperwork is filed, the business owner must create an LLC operating agreement, which specifies the business structure.
Also referred to as a sole trader or a proprietorship, a sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. As such, they are very popular among sole owners of businesses, individual self-contractors, and consultants. Most small businesses start as sole proprietorships and either stay that way or expand and transition to a limited liability entity or corporation. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.
Transition From Sole Proprietor to LLC
Sole proprietorship begins when you begin conducting business. It doesn’t require filing federal or state forms and has few regulatory burdens, making it an ideal way for self-employed people to start out. This unlimited liability goes beyond the business entity to the owners themselves. It can be difficult to get capital funding, specifically through established channels. Standard funding avenues include the ability to issue company equity and obtain bank loans or lines of credit.
Converting a sole proprietorship to an LLC requires you to file articles of organization with your state secretary. Also, you will have to refile your DBA (or doing business as) to keep your company name. For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business owner. Since launching in 2005, Kate’s Real Food has grown to supply accounts across the country. In response, Schade restructured the business from a sole proprietorship to a corporation to take on investments and expand, a natural step for a growing business.
Sole Proprietorship vs. LLC vs. Partnership
There are some disadvantages of sole proprietorships, which can be impactful to the business owner. A sole proprietorship provides no liability protection to the owner. The owner has protection against creditors seizing their personal assets, such as their home. To start a sole proprietorship, you generally have to launch your business. Depending on your business and local regulations, you may need to apply for a permit or license with your city, county, or state.
- In response, Schade restructured the business from a sole proprietorship to a corporation to take on investments and expand, a natural step for a growing business.
- That’s because there aren’t the usual legal hurdles that you have to overcome with other types of business organizations.
- Sole proprietorship begins when you begin conducting business.
For example, Kate Schade started her company, Kate’s Real Food, as a sole proprietor. The company creates and sells energy bars and began as a local vendor in Jackson Hole, Wyoming. The sole proprietorship currently has a production facility in Bedford, Pennsylvania, and can be found in more than 4,000 retailers.
Understanding Sole Proprietorships
Banks prefer to work with companies that have a track record and generally view those who are starting out with a small balance sheet as high-risk borrowers. A sole proprietorship is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business. Many sole proprietors do business under their own names because creating a separate business or trade name isn’t necessary.
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Generally, these businesses don’t have a wide range of customers but rather a small, dedicated group. Sole proprietorships often start as hobbies that grow into a business. A sole proprietorship has no separation between the business entity and its owner, setting it apart from corporations and limited partnerships.
If you plan to hire employees, you will need an employee identification number from the IRS. If you are going to sell taxable products, you will need to register with your state for a sales tax license. As noted above, there are certain distinctions between a sole proprietorship and a limited liability company and a partnership. The chart below highlights some of the key differences between the three. If you want to start a one-owner business, the simplest and fastest way is through a sole proprietorship.
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Finally, the new company must obtain an EIN—similar to an SSN, but for businesses—from the IRS. If you plan to hire employees, you will need an EIN from the IRS. If you are going to sell taxable products, you will need to register for a sales tax license with your state. Together, these businesses employed 61.7 million people across the country.