The sole proprietorship is the simplest of the three primary forms of organization and the form used by the majority of new businesses. There are usually no setup costs if you decide to do business under your own name.
If you want to operate your business under a trade name, you need to register with your local county clerk office. The requirements differ from one place to the next, but most counties require you to complete and file a business certificate form, also referred to as a certificate of doing business under an assumed name (or just a DBA, doing business as, for short).
Pros of a sole proprietorship
Here are some of the advantages to a sole proprietorship:
A sole proprietorship is easy to create. If you choose to operate under your own or an assumed name, all you need to do is complete a form similar to the one shown. Each county has its own form, and you can get the form you need from your county clerk's office. You have to sign the form and get it notarized; then it has to be certified by the office of the county clerk. You can do all this in one day.
A sole proprietorship is the least costly form of ownership. You don't have to create or file any legal documents, as may be required with corporations. You just have to complete the form, visit the local office of the county clerk, and pay a nominal fee, which can range from $35 to $125, depending on where you live.
A sole proprietorship has a profit and tax incentive. After expenses, you get to keep all the remaining profits. You report the net income on Schedule C of IRS Form 1040, and the income is then taxed at your personal tax rate. This form of organization doesn't require the business to pay any separate taxes. Because you're self-employed, this income is also subject to the self-employment tax, which is currently 15.3 percent.
A sole proprietor has decision-making authority. Because you're the sole owner, you have complete control over any decision, giving you the ability to respond immediately to any changes.
There are no special government regulations regarding sole proprietorships. A sole proprietorship is the least-regulated form of business organization, although it does have to follow all laws that apply to the business.
You can easily dissolve a sole proprietorship. You don't need the approval of co-owners or partners. However, you're still personally liable for any outstanding debts that the business hasn't paid.
A business certificate.
Cons of a sole proprietorship
Here are the disadvantages of a sole proprietorship:
Sole proprietors face unlimited personal liability. You have no separation between personal and business assets. The company's debts are your debts. A creditor can force the sale of your personal assets — such as your house or car or other assets — to recover any unpaid or outstanding debt. This is the primary disadvantage of this form of organization.
A sole proprietorship is limited to whatever capital you've contributed or whatever you've personally borrowed. A sole proprietorship may find it difficult to obtain additional funding because of lack of collateral. And a sole proprietorship pays higher interest rates because it's a greater risk than a corporation is.
The sole proprietor may lack the complete range of skills required to run a successful business. You must be able to perform a wide variety of functions in areas such as management, marketing, finance, accounting, and human resources. If you can't do all this yourself, you'll need to hire employees to do it for you.
If you die or become incapacitated, the business ceases to exist.