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Advantages and Disadvantages of a Sole Proprietorship

The main benefits of a sole proprietorship are the pass-through tax advantage
mentioned before, the ease of creation, and the low fees of creation and maintenance.

With a sole proprietorship, you do not need to fill out a tremendous amount of
paperwork, such as registering with your state. You may need to obtain a license or
permit, depending on your state and type of business. But less paperwork allows you to
get your business off the ground faster.

The tax process is simpler because you do not need to obtain an employer
identification number (EIN) from the IRS. You can obtain an EIN if you choose to but
you can also use your own Social Security number to pay SSN taxes rather than
needing an EIN.

In addition, because you are not required to register with your state, you do not need to
pay any fees associated with renewing your registration or any other fees associated
with the process. This saves you a lot of money, which is important when starting your
own business.

With a sole proprietorship, you don't need a business checking account, as other
business structures are required to have. You can simply conduct all your finances
through your own personal checking account.

There are 32.5 million small businesses in the United States. 1

The disadvantages of a sole proprietorship are the unlimited liability that goes beyond
the business to the owner and the difficulty in getting capital funding, specifically
through established channels, such as issuing equity and obtaining bank loans or lines
of credit.

When a business is registered, it has some protection from the state. As a sole
proprietorship is not registered, you have no support when it comes to liability. An LLC
has protection against creditors from seizing your personal assets, such as your home.
With a sole proprietorship, you do not have such protection.

Funding can also be difficult with a sole proprietorship. Banks prefer to work with
companies that have a track record. Being an individual who is starting out with a small
balance sheet can make it a risky endeavor for banks to lend money. Also, obtaining
equity from large investors can be difficult as they prefer more refined startups.

Thus, entrepreneurs begin as an entity with unlimited liability. As the business grows,

they often transition to a limited liability entity, such as an LLC or LLP, or a corporation
(e.g., S Corp, C Corp, or Benefit Corp).

Pros
 https://www.investopedia.com/terms/s/soleproprietorship.asp

 Less paperwork
 No need to obtain an employer identification number (EIN) from the IRS
 Quick and easy setup compared to other business structures
 Low fees and costs
 Pass-through tax advantage
 Easier banking

Cons
 Unlimited liability goes from business to owner
 Difficulty in raising capital

Real World Example

Most small businesses start as sole proprietorships but end up evolving into different
legal structures as time passes and the company grows. For example, Kate Schade
started her company, Kate's Real Food, as a sole proprietor. The company creates and
sells energy bars, and it began as a local vendor in Schade's hometown of Victor,
Idaho. The sole proprietorship sold its energy bars at local farmer's markets and then
expanded to sell online and to a few accounts in Jackson, Idaho.

 
A sole proprietorship has no separation between the business entity and its
owner, setting it apart from corporations and limited partnerships.

Since launching in 2005, Kate's Real Food has grown to supply accounts across the
country. She restructured the business from a sole proprietorship to a corporation to
take on investments and expand, which is a natural step for a growing business.

Special Considerations
Usually, when a sole proprietor seeks to incorporate a business, the owner restructures
it into an LLC. In order for this to work, the owner must first determine that the name of
the company is available. If the desired name is free, articles of organization must be
filed with the state office where the business will be based.

After the paperwork is filed, the business owner must create an LLC operating
agreement, which specifies the business structure. Finally, an employer identification
number (EIN), similar to a Social Security number for businesses, needs to be obtained
from the Internal Revenue Service (IRS). 2

How Do You Start a Sole Proprietorship?

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To start a sole proprietorship you need to for the most part just start your
business. It does not require registering with your state. It is recommended to
come up with a company name and then apply for a permit or license with your
city and state if needed. If you plan to hire employees then you will need an
employee identification number (EIN) from the IRS and if you are going to sell
taxable products you will need to register with your state.

Is Sole Proprietor the Same as Self-Employed?

Yes, a sole proprietor is the same as self-employed. A sole proprietor does not
work for any company or boss, just for themself, hence they are self-employed.

How Do You File Taxes as a Sole Proprietor?

Filing taxes as a sole proprietor requires you to fill out the standard tax Form
1040 for individual taxes and then Schedule C, which reports the profits and loss
of your business. The amount of taxes you owe will be based on the combined
income of both Form 1040 and Schedule C.