Sole proprietorship as a business structure - Advantages & disadvantages

Do you know what sole proprietorship is? A sole proprietorship is a business which has only one owner. It is a 'sole' proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in his own name and there is only one owner. A sole proprietorship is not a corporation, it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits, making accounting much simpler.


Most sole proprietors will register a trade name 'Doing Business As'. This allows the proprietor to do business with a name other than their legal name and also allows them to open a business account with banking institutions.A sole proprietorship has an authority to hire any number of employees because the law makes no distinction between you, the sole proprietor, and the business. Sole proprietorship has also an authority to hire independent contractors of their own choice.


Whether the proprietor has zero or 100 employees or independent contractors, it doesn't make any difference. If you are the sole owner, your business will still be a sole proprietorship.There are several advantages associated with operating as a sole proprietor. Starting a business as a sole proprietor brings two tax advantages. The first advantage is avoidance of double tax. Operating as a sole proprietor also has some drawbacks. A business organized as a sole proprietorship faces difficulty in raising own capital since shares of the business cannot be sold. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor's who will be responsible.


Double tax can occur if you carry out your business through a corporation. Corporations are considered as separate entities consisting of many partners or owners. As a result the corporation owners will pay tax on their individual income and the corporation will pay tax on any profits made by the company. As a sole proprietor, you will not pay double tax on your business income because the law makes no difference between you, the sole proprietor, and your sole proprietorship and the business income is treated as your personal income.The second tax advantage of sole proprietorships is that you can deduct your business losses to the extent of your total income that you may have from all sources, including interest, dividends, and profits.