Most people looking to have their own business usually start by looking at some sole proprietorship examples. After all, when you don't know what to do as a startup, looking at what other people did before you can give you a couple of ideas.
Business ownership, regardless of the business entity that you choose, will have its own challenges in terms of decision-making. By deciding which business organization works best for you, it will be much easier to make a decision.
Note: if you want to be equipped with all of the tools to run your sole proprietorship business like invoice, contract, proposal templates, an expense tracker and a business bank account. All in one place. Try a 7-day free trial today.
What Is a Sole Proprietorship?
A sole proprietorship is a type of business that is owned by just one person - usually, independent contractors. That person will receive all the profits of the business, but they will also be personally liable for any potential losses.
Most business owners start their solo career as sole proprietors, as it gives them tax advantages and the ability to do their own work, at their own pace. However, due to the unlimited liability, sole proprietorships are only considered the stepping stone to limited liability companies.
Advantages and Disadvantages of Sole Proprietorships
Sole proprietorships represent a great step to becoming your own boss, but at the same time, they fly at great risk. As a business owner, it is your responsibility to consider all of the aspects before taking the leap. Let's review the advantages and disadvantages of sole proprietorships.
Advantages of Sole Proprietorship
Sole proprietorship come with many advantages, including:
Fast Tax Preparation
Sole proprietors don't have to worry much about how they file taxes. Those with this type of business will only need to file form 1040 for individual tax returns, and then Schedule C for profits and losses.
Government Regulation
People turning their hobbies into a separate business will have certain government or local regulations to follow. A sole proprietorship must follow fewer of those rules. Sure, you may need to get some licenses, especially if you want to hire employees, but overall, the government paperwork is thin.
It's Easy to Handle the Money
As a sole proprietor, it is much easier to handle money as compared to other business types. Since you are paying yourself, you won't have to set up any fancy payroll systems. That being said, to make your small business administration easier, you may want to get a separate bank account such as Bonsai's business account.
Low Startup Costs
A sole proprietorship does not need too much money to get started. Unlike corporations or an LLC operating agreement, this type of business entity doesn't have too many special forms or high set-up fees.
Disadvantages of Sole Proprietorships
There are also certain disadvantages to sole proprietorships, such as:
Unlimited Liability
As the owner of a sole proprietorship, you are fully liable if something goes wrong with your business. Unlike other business types that protect your personal assets, this one puts you at risk of losing everything if you have debts incurred.
Limited Growth Potential
People with this small business ownership type have a difficult time when it comes to finding investors. As a result, once they get to a specific point, they may find it difficult to expand their business legally unless they restructure.
Lack of Financial Control
As a sole proprietor, you do not need financial statements to handle your finances, as a corporation needs. As a result, you may feel like you do not have complete control over your finances.
Business Structures with a Sole Proprietorship Model
Before you set out as a business owner of your own sole proprietorship, you need to determine what kind of business you want to get into. Here are some examples of sole proprietorships that can help you bring income.
Freelance Writer
As a freelance writer, you would be providing written content for people or brands for their marketing efforts. This can include anything from non-fiction articles and blog posts to news articles, web pages, and social media advertising.
You will be writing the content on your own, without working with anyone else, which makes it the perfect example of a sole proprietorship. Read our resource on how to win freelance writing clients.
Freelance Photographer
People that are good with a camera can also start sole proprietorships. Most photographers only have a camera, a laptop, and a car to drive to the location where the photo shoot takes place.
With these types of business entities, you may apply for a DBA business name, and pay personal income tax through it.
Graphic Designer
As a graphic designer, you can create marketing items such as brochures, flyers, and even business logos. Often, graphic designers are employed by the marketing department of a company, but you may also create a separate legal entity for yourself.
This type of business brings numerous tax advantages when it comes to the Internal Revenue Service (IRS), which means you can get deductions for your business expenses.
Read our guide to start a graphic design business.
Landscaper
Do you have a passion for making other people's backyards look pretty? In that case, you probably already looked into landscaping small businesses.
You need the landscaping tools and perhaps a truck to carry all of them to the location. Besides this, you will not need to partner with any other people. It's the perfect idea for a sole proprietorship.
Plumber
Plumbers can be employed by construction companies, but they can also work as independent contractors. This makes this job the perfect choice for a sole proprietorship.
As long as you have a license or some sort of certification for your practice, you may set out as an unincorporated business. This way, you can build your brand while reaping the pass-through tax advantage of sole proprietorships.
Financial Planners
Do you like organizing finances? Perhaps you have a subscription or two to software that allows you to secure your financial future. In that case, and if you have the knowledge for it, then you may consider setting up a sole proprietorship for financial planners.
As a financial planner, you may help plan for security investments, help people set up retirement packages, and even help them reach their savings goals. It's perfect for individual self contractors that prefer running home-based businesses.
Accountant
Accountants generally work with small businesses, auditing their cash flow. You may want to use different accounting tools such as Hello Bonsai, which is actually very popular among freelancers.
Accountants have to handle bookkeeping and tax preparation, which can easily be done with tools such as Bonsai's business account or Bonsai Tax. Plus, everything can be done from your computer, so you may turn these types of business entities into home-based businesses.
Housekeeper
If you like to see the world look nice and clean and don't mind cleaning other people's homes for a fee, then you may want to consider a housekeeping service.
Target a small area where you may pitch your service - your neighborhood, for example. If you register the business structure as a sole proprietorship, then you should be able to get tax deductions for the tools you use.
Arts and Crafts Venture
Do you have a talent for creating handmade jewelry? Or perhaps you can use pictures to create fabulous paintings of people. If so, this is a great example of a sole proprietorship.
Nowadays, many people bring their business on platforms such as Shopify or Etsy. Once you register as a sole proprietor, you can claim tax deductions. This is a great option for someone who pays personal income tax, with no legitimate ability to claim business expenses.
Baker
Do you enjoy cooking? Perhaps you have a hand at creating delicious-looking goodies in cute shapes. In that case, you may open a bakery, where you create the goods at home and have them delivered to different locations.
You need to find out the regulations from your state's health department. But other than that, it should be easy to set up a sole proprietorship and bring some business income your way.
Real-World Examples of Sole Proprietorship
In the past, many small business owners started out their careers as sole proprietors, until they decided to change their business structure. Here are the most popular small businesses that ended up going big.
J.C. Penney
James Cash Penny used to be an employer in 1988 for a small retail chain until he bought the shares from the existing partners. At first, he ran his business, J.C. Penny, as a sole proprietor but ended up incorporating about 25 years later.
Sears, Roebuck and Co.
One of the biggest retailers in the U.S., Sears, originally started out as a sole proprietorship. During that time, Richard Warren Sears sold jewelry and watches through mail order. Later on, the sole proprietorship became a partnership, as he joined forces with Alvah Curtis Roebuck to also repair watches.
A&W
J. Willard Marriott originally began his root beer stand as a sole proprietorship, where he took his hobby and labeled it as a separate legal entity. As he began getting more income, he restructured his business like many sole proprietors of his time and started his A&W restaurant chain. The expansion was followed by incorporation, and A&W led to the formation of the Marriott Hotel Chain.
Kate's Real Food
Kate Schade started her company, Kate's Real Food, as a sole proprietor. Schade was selling energy bars as a vendor in a small town in Idaho (Victor, to be more precise). As the small business grew and Kate began selling outside the state (and even outside the country), she switched from sole proprietorship to corporate structure and expanded her business.
FAQ
If you are curious about sole proprietorships, here are some frequently asked questions, together with their answers.
Is Coca-Cola a Sole Proprietorship?
At first, Coca-Cola started as a sole proprietorship, owned by Dr. John S. Pemberton in 1886 and bought by Asa Chandler in 1892. The company has evolved over time, and it is now a corporation.
Is Amazon a Sole Proprietorship?
Officially speaking, Amazon is registered as a Limited Liability Company (LLC). That being said, looking from the perspective of the seller, Amazon behaves as a sole proprietorship. As a sole Amazon seller, you are selling to Amazon users, without the help of any employees - which can be seen as a sole proprietorship.
How Do You File Taxes as a Sole Proprietor?
As a sole proprietor, you will have to fill out Form 1040, which is the standard form for individual taxes. After that, you need to file Schedule C, which reports all the losses and profits incurred by your business. The tax amount that you know will be based on the income of both files combined.
Is a Sole Proprietor the Same as a Self-Employed Individual?
Yes, a sole proprietor is, by definition, a self-employed person, as they do not have to work as an employee for a boss. The only difference is that while a sole proprietor focuses on running their own business, a self-employed person focuses on their skillset, offering them for limited times. They are independent contractors, so they do not provide their services just to one business.
Do I Need a Business Bank Account for a Sole Proprietorship?
No, business bank accounts are not legally required for a sole proprietorship. The only exception for that is if your business name is registered as a DBA. That being said, you may still want to get separate accounts, to keep your business funds separate from your personal assets. For example, the "Envelopes" feature of Bonsai's business account can help you organize your business finances.
The Bottom Line
There are plenty of opportunities for you to make a living from a sole proprietorship. Once you find the one that works best for your skills, you may use the sole proprietorship as a stepping stone to launching a career.
