A common question asked amongst new entrepreneurs and business owners are: how many owners does a sole proprietorship have?
Well, according to the Small Business Administration, a sole proprietorship or sole trader is a business with only one owner. Since they are an unincorporated business, they will pay personal income tax on profits earned.
So, if a person starts a business as a single person without any further legal steps or registration, that business is a sole proprietorship. The lack of government regulation is the reason why a sole proprietorship is the most common type of business. Let's quickly review the definition of a sole proprietor.
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What It Means To Be A Sole Proprietor
As the name suggests, business ownership is only one owner or person in a sole proprietorship. Sole proprietorship examples could be a freelance writer, graphic designer or an artist. Corporations on the other hand, can have multiple owners and hold shares of the business. Since there is no separate legal entity and only one owner, the business does not exist separately from the owner. If the owner dies, the business ceases to exist. Typically, the business operates under the legal name of the owner of a sole proprietorship unless the owner files a fictitious name or DBA ("doing business as"). A fictitious business name or trade name allows the business owner or sole proprietor to open a business checking account under the DBA.
Perks And Drawbacks
There are many advantages and disadvantages of sole proprietorships. Let's review some of them.
Pros
The greatest benefit of sole proprietorships are the face that it would be super easy to set up as a form of business that requires no paperwork filing.
It is much cheaper to form a sole proprietorship and you have full business ownership or complete control of the operation.
Also, a sole proprietorship does not have to pay corporate taxes. There are no filing or associated fees when it comes to taxes. Sole proprietors only have to follow licensing, permit, local regulations, and zoning ordinances. Since sole proprietorships typically rely on their own income and bank loans to start or establish their business, this can lower start-up costs for small businesses.
Cons
One of the main disadvantages to being a sole proprietorship is that the owner is personally liable for any debts incurred by the business. Since sole proprietors have unlimited liability, their personal assets are at risk. You'll be entitled to all the profits, as well as responsible for handling all of the business's debts and liabilities incurred.
For example, if a sole proprietor is sued or in large debt, folks, as well as creditors, can go after both personal and business assets.
Again, this is due to the business owner and the personal identity being one. Many people start off with sole proprietorships and as they grow, restructure to business structures like Limited Liability Companies or corporations. Business owners are often attracted to a limited liability company as a business structure because they can have a separate business entity to avoid putting their personal assets at risk.
If a sole proprietor is ready to set up a separate business structure, then they'll file articles of incorporation with . a state agency.
You can discover more about how to change from a sole proprietorship to an LLC here.
How Many Owners Can Sole Proprietorships Have?
An individual cannot be considered a sole proprietorship with multiple owners. However, if a husband and wife work in the business, it is legal to operate as a sole proprietorship. Usually, when two (or more) people want to form a business together, they will form a general partnership. Just like a sole proprietorship, this form of business does not require registration with the State. Partnerships can just start and operate when two or more people decide to do business together.
Many sole proprietorships and partnerships seek outside investors to grow their business. However, unlike a corporation, they cannot sell shares of the company.
A sole proprietorship has one owner who is personally liable for the company's debts. A partnership is formed when two or more persons pool their resources for the benefit of the company and share profits and losses.
Why It May Be A Good Idea To Start A Business Entity
Many sole proprietors ask when is the best time to switch from a sole proprietorship to an LLC. Simply put, in order to protect your personal assets, a good point to start an LLC is right away. A limited liability company or corporation can help protect your assets and avoid unlimited liability.
A drawback of having the corporate structure is the double taxation that shareholders face if the corporation pays out dividends. Here's how double taxation works. If a company pays income tax on its profits, shareholders would also pay taxes on the dividend income they receive from the profits distributed.
According to the Internal Revenue Service, a sole proprietor is not taxed separately from the business.
Always seek the advice of a law firm or lawyer for advice in regards to your specific situation or business.
How Do You Protect Yourself As A Sole Proprietorship?
There are ways you can protect yourself without forming limited liability companies or other business structures.
Business Insurance
Just like a car or home insurance, you could purchase sole proprietorship or business insurance to protect your assets. So, even if you have an accident or are sued for negligence, your business insurance can cover settlements or legal fees up to the policy amount.
General Liability Insurance
Look, accidents happen. General liability insurance can protect you from any accidents for damaged property and personal injury. If a mishap occurs, and the property gets damaged or someone gets hurt, you'll be able to claim insurance for coverage based on your policy.
Liability Waiver
Another option to avoid unlimited liability is to have your clients or folks you work with sign a liability waiver. Many websites or software have some sort of "Terms of Service" or a waiver to acknowledge any risks of content from their website. You could do the same for your businesses. A liability waiver can save you thousands of dollars if you take the proper precautions.
Key Takeaways
In summary, a sole proprietorship is an unincorporated business owned by one person. They own all of the profits and debts the company incurs. Because there are no other owners and no legal restrictions on ownership, the solitary proprietor is free to do whatever it takes to keep the business running. Limited liability companies can help take some of the risks of your personal assets being sought after if you are in any legal trouble.
A sole proprietorship is a business formed by a single or one person and acts as the only owner/operator. Because there are no other owners and no legal restrictions on ownership, the solitary proprietor is free to do whatever it takes to keep the business running. Alternatively, a corporation is influenced/exercised by the board of directors, over which the original owner has only partial control (even if he or she owns a controlling interest).
