Chapter 3 - Four Ways To Form Your Company:
Forming a Sole Proprietorship -
An Easy Way to Get Your Business Organized
Forming a Sole Proprietorship -
Is the quickest way to form a company
 There are many different forms your business can take. The sole proprietorship is one of the most common forms.
As with any business decision, being a sole proprietor has distinct advantages and disadvantages.
It is important that you learn about these characteristics since they can have a large impact on the future of your business.
What is Sole Proprietorship?
In a nutshell, a sole proprietorship is a business that is owned directly by a single individual.
That individual, known as a sole proprietor, is solely responsible for all aspects of the business and is personally liable for all debts, even those in excess of the amount invested in the business.
The most important feature for you to understand about a sole proprietorship is what the law has to say about you and your business – you are one and the same.
The law makes no distinction between the two. Anything that happens in your business is happening to you personally in relation to anything legal, such as taxes or liability.
Now that you understand what a sole proprietorship is, let's look at the advantages of forming one.
Five Advantages to Having a Sole Proprietorship
Many business owners offer a sole proprietorship because of tax advantages that arise from the fact that you are your business.
The first tax advantage is the avoidance of a double tax. If you incorporated your business, your business would pay an income tax AND you would pay an income tax as an employee.
Therefore, any amount that you paid yourself as a corporation would be taxed twice.
However, as a sole proprietorship, all your business income is treated as your personal income, so you are only paying personal income taxes and no business income taxes.
The second tax advantage deals with the deduction of losses.
 You will be able to deduct business losses against your total income, even income that has nothing to do with your business such as interest, dividends, or even property sales.
In fact, if you are married filing jointly, your business losses will offset your spouse's income as well.
This can reduce your family's tax burden, which is very useful during the start up phase of your business or during a downturn.
Other advantages of a sole proprietorship include:
- Low organization costs
- Greatest freedom from regulation
- Minimal working capital
Now let's take a look at the disadvantages.
The Disadvantages of a Sole Proprietorship
The biggest disadvantage of being a sole proprietor is that you will be liable for all your business debts personally.
Once again, this is because the law does not distinguish between you and your business.
In order to pay for debts, anything you own, including your home, cars, etc, can be taken.
Other disadvantages include:
- Difficulty in raising capital
- Difficulty hiring employees
- Difficulty finding health care insurance for you and your employees
- As the business becomes successful, the risks, such as liability, grow.
Since every business is different, what may be an advantage to you will be a disadvantage to someone else.
However, since the tax and legal implications are so great, you need to be aware of them to avoid problems in the future.
See Also:
Forming A Sole Proprietorship
What's Next
Next In This Guide
 Forming A Business Partnership - And Avoid What Destroys Them - A partnership is one of the four general ways you can choose to organize your business. As John D. Rockefeller once said, "It's better to have a friendship based on a business partnership than a business partnership based on a friendship."
Previous In This guide
 Business Competition -
What You Don't Know CAN Hurt You! - Finding out what your business competition does right, as well as what it does wrong, what they charge, and what they feel is the next big trend in the business will give your business a significant boost.
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