Types of Business Entities | Sole Proprietorships (2024)

We mentioned, in our prior post, the following areas to review when contemplating business structures for your company:

Sole proprietorships are considered the easiest business entities to form and manage. The following are examples of ways they are simpler than other entities.

• Establishing a Business Name:It can operate under its owner's name, or a made up trade name.
• Business registration:Acquiring the appropriate license (s) or permit(s) and registering with the local government is all that's necessary.
• Ongoing Administration:There aren't reporting requirements, like that of a corporation, to weigh down on an owner's management efforts.

In regards to tax, these business entities are subject to federal, state, local, and self employment taxes on their net profits.

Depending on their level of earnings, owners may want to consider the S-Corporation business structure for tax advantages.

Owners of these business types are able to report any income earned through their personal tax return requiring no separate business return and simplifying the tax filing process. There is less documentation since there isn't a requirement for a separate balance sheet.

Owners have full control over business decisions. In other words, the founder(s) have complete control over the company. While in partnerships, partners must come to an agreement and other structures involve shareholders. They have the advantage of being able to make decisions on the spot. No formal decision or evaluation processes are necessary.

This also contributes to the flexibility of the companies reducing any extra managerial efforts.

For these business entities, owners have only two options for funding. They can only use their own assets or take out debt. Whereas partnerships, for instance, can split investment between partners. Other company structures have the advantage of selling stock.

Owners are accountable for all their business's debts, losses, and liabilities. In other words, acting as a sole proprietor may not be in the best interest of an individual whose business exposes them to risk of debt or lawsuit. Being accountable for all their business's liabilities means their personal assets are at risk.

• Sole proprietorships are available for individual owners (or married couples).
• Owners may want to consider other entity types for tax advantages.
• Some owners may prefer their simpler tax filing requirements with this business type. As well as the convenience of having less documentation requirements.
• Many owners may prefer complete control over their company.
• An owner should consider another entity type if they don't have enough wealth to start the company and do not want to take on the extra debt necessary to fund it.
• Owners should keep in mind that their personal assets are vulnerable to the risks involved in their company.