Undoubtedly, a single-member business which we called a sole proprietorship is the best way to get complete control over your business. This type of business never formally incorporated with a state filing. The income from the business of sole proprietor is treated as personal income. In the U.S., a businessman can declare this income as a part of Schedule C, Profit and Loss from a profession or business with a standard 1040 Federal Individual Income tax return.
You will likewise require a form 1040ES, Declaration of Estimated Tax for Individuals. The IRS will supply you with vouchers for the submission of quarterly evaluated tax payments. These installments are made in January, April, June, and September. What’s more, obviously, being ready to go for yourself, you will also need to pay all the required payroll taxes, plus state income taxes and city income taxes.
Here are some of the advantages and disadvantages of the sole proprietorship that everyone should know. Have a look!
The Pros of Sole Proprietorship
- Easy Setup & Low Cost
- No Corporate Business Taxes or Double Taxation
- No Annual Reports or Filings
- Not Restricted by Formal Business Structure
- Easy Record Keeping
Compared to other business entities, sole proprietorships have functional and tax advantages. Such kind of businessman also avoids from incurring “double taxation” on business income, as in a corporation. Double taxation, which other business entities such as corporations may be subject to, means that the business’ income is taxed once when the business makes the profit and again when that profit is paid to the owners. In a sole proprietorship, the proprietor is only taxed once, because business profits are filed only on his personal income tax form.
The Cons of a Sole Proprietorship
- Unlimited Liability
- No Ongoing Business Life
- Difficult to Raise Capital
- Can’t Take on Business Debt
- Perceived Lack of Professionalism
With contrast to the other business entities, sole proprietorships also have liability and functional disadvantages. The biggest drawback of a sole proprietorship is the potential exposure to liability. In a sole proprietorship, the owner is actually at risk for any obligations or commitments of the business.
This implies that lawsuit claimants or creditors may have access to the owner’s personal accounts, assets, or property if any business accounts cannot cover his debt. While the restriction on possession can be a useful preferred standpoint for a proprietor, it very well may be a weakness. In the event that a proprietor of a sole proprietorship wishes to incorporate another proprietor, he should break up the sole proprietorship and shape another business substance, for example, a general organization. There is one special case to this generally firm principle – a proprietor can be a “co-sole proprietor” with his life partner.