In layman's terms, what is a sole proprietorship?
The simplest and most common way to start a business is through a sole proprietorship. There are several reasons why someone may decide to start this type of business:
- Sole proprietorships are easy and inexpensive to set up. Complex paperwork or the formation of a separate legal entity are unnecessary.
- The owner is able to have complete control over all business decisions and operations. There's no need to engage in consultations with partners or shareholders.
- Since the business income is deemed to be the owner's income, it is taxed as personal income instead of corporate income. Simplifying the tax process can sometimes lead to lower tax rates.
- The simplicity of it allows for less regulatory paperwork and administrative tasks than other business structures, such as corporations or partnerships.
However, the major drawback is the lack of legal separation between the owner and the business, meaning personal assets are at risk if the business faces legal issues.
What distinguishes a sole proprietorship from a separate entity?
Sole Proprietorship
- It is owned by one person.
- The owner is responsible for all business debts and legal actions taken by them. There is a possibility that one's personal assets could be at risk.
- Business income is categorized as personal income and is taxed based on the individual's tax rate.
- Complete control over all business decisions is owned by the owner.
- Setting up is simple and inexpensive, with minimal regulatory requirements.
A legal entity that is separate from another entity (such as a corporation or LLC)
- Ownership can be held by one or more individuals or entities.
- Limited liability for owners (shareholders or members) ensures that their personal assets are generally protected from business debts and legal actions.
- The complexity of taxes can vary depending on the structure. It's possible for corporations to be taxed separately from their owners, which could result in double taxation (both at the corporate and individual levels).
- Control is able to be shared between owners or designated managers, depending on the organizational structure.
- Establishing a setup is more complicated and costly, and it requires more regulatory and administrative requirements.
