Benefits of Operating as a Sole Proprietor
The sole proprietorship has no forms to submit to governmental entities other than a tax form, which consists of paperwork required by tax laws as the result of specific economic activities, such as paying wages to employees. If a sole proprietorship has any employees, the sole proprietor must obtain an Employer Identification Number from the Internal Revenue Service and report employee compensation paid to and employment taxes withheld from employees. The Employer Identification Number (EIN) is a unique number issued by the Internal Revenue Service and is used to identify a business that has employees.Once the sole proprietorship business begins, the sole proprietor has the right to make all business decisions. No partners, boards of directors, or management committees exist in a sole proprietorship, so the sole proprietor can make the necessary decisions without input or delay from others.
Benefits of a Sole Proprietorship
A sole proprietor is often eligible for several tax benefits. A sole proprietor can establish a simplified employee pension (SEP), which is a tax-deferred retirement plan for that individual. SEP plans allow the sole proprietor to designate up to 25% of the earnings from business or $55,000 (in 2018), whichever is less, into an individual retirement account (IRA). The amount put into the SEP is not taxed to the sole proprietor until the funds in the SEP are disbursed after the sole proprietor retires.
Also, if the sole proprietorship has at least one employee in addition to the sole proprietor, then the sole proprietorship can buy health insurance for the sole proprietor and employees. The sole proprietor pays the cost of that insurance as a business expense that is deductible in determining the profit or loss of the sole proprietorship business.
Drawbacks of Operating as a Sole Proprietor
Unlimited Liability and Sole Proprietorships
An additional drawback of using the sole proprietorship form of doing business involves the continuity of business concept. Continuity of business is the ability of a business to endure in a consistent form. In a sole proprietorship, one person owns the business. That person can sell the business that the sole proprietorship operates, but what can be sold is essentially what the business owns, not the business itself.
For instance, a lawn mower repair shop operated as a sole proprietorship can be sold. However, what is sold are the assets, such as tools, customer lists, and any prepaid advertising and leasing that is unused. The sole proprietorship business itself will cease to exist when that sale is final, and the purchaser of the business will form a new sole proprietorship or operate the business in some other business form.This lack of continuity of the sole proprietorship business can also be an issue when a sole proprietor dies. That sole proprietor's heirs can inherit the business, but if that business continues to operate, it will either be as a new sole proprietorship operated by a new sole proprietor or as some other form of business.