o you've finally decided to take the plunge and launch your business idea, but you're not sure what type of business structure is right for you. It's important that you understand common business structures, their tax requirements, benefits, and downfalls. Today, we will talk about what it means to be a sole proprietor, how it benefits you, and what challenges it brings. Read on to see if it’s the right business type for you.
What Is a Sole Proprietor?
Here’s our definition of sole proprietor:
Also known as a sole trader, this is the owner of a type of business where that person accrues all of the business’ profits, debts, losses, and liabilities.
A sole proprietorship is one of the most common business structures out there. It does not exist as a separate legal entity. Instead, “sole proprietor” is simply a term that defines how a person owns a business, and there is no separation between the person and the business. That means that you may already be a sole proprietor without knowing it. For example, if you’re a freelance writer, you’re automatically a sole proprietor. We touch more on common businesses below. Starting a Sole Proprietorship As of 2016 (the last time the IRS released statistics on sole proprietorships), there were 25.5 million sole proprietors in the U.S. (excluding farmers). This type of business structure is the most common one in the country. To start one, you need an idea and a way to make money from it. [caption id="attachment_1270" align="alignnone" width="525"]
Benefit: Filing Taxes is Easier
When you operate as a sole proprietor, you don’t need to get an employer identification number (EIN). Instead, you need a Social Security number. So if you’re planning to start a YouTube channel, become an Airbnb host, or continue your work as a freelancer, tax season is simpler if you’re sole prop. You do need to register a “Doing Business As” (DBA) if you’re operating under a name different than your own.
Challenge: Taxes May Be Higher
Taxes are tricky for sole proprietors, because some business owners may be eligible for a 20% tax deduction. However, even with the 20% tax deduction, sole proprietors may pay more to the IRS than freelancers who register as LLCs. Here’s more info on how sole props are taxed. [caption id="attachment_1276" align="alignnone" width="525"]
Benefit: You Will Deal With Less Paperwork
When starting a business, you sometimes need paperwork. With a sole proprietorship, you do not have to deal with the paperwork of registering your business. The second you start that YouTube channel or begin writing for cash, you are officially a sole proprietor.
Challenge: You Are Fully Liable
We established that all sole proprietors are on the hook for all the profits and losses their business accrues. They are also fully liable for debts or other legal obligations of the company. That means that they are also legally responsible for all employee actions.
Common Types of Sole Proprietor Businesses
Do you think of yourself as a business owner? Many people who work solo either full-time or as a side hustle are considered business owners in the eyes of Uncle Sam. Many sole proprietors are part of the gig economy. Here are some common types of sole proprietor businesses.
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- Home Healthcare Assistant
- Freelance Writer or Artist
- Content Creator
- Social Media Influencer
- Financial Planner
- In-Home Tutor
- Uber or Lyft Driver
Starting your business as a sole proprietorship is straightforward because you don't have to file a lot of paperwork. On the other hand, you are responsible for any financial or legal challenges your business experiences. Life as a sole proprietor is better with a small business checking account. Apply with Novo today to manage all your business finances from one place.