Business Typesadmin / January 22, 2019
Globally, the most common types of business ventures involve individuals. Most of today’s competitive sovereign firms begin as solely owned small or medium sized enterprises. People conceive the sole ownership as a common form of business type that almost anyone venturing into the entrepreneurship sector has the same concept in mind.
According to Jones (p.1), sole proprietorship is an individual business and not a corporate, thus the emergence of the term ‘Sole’, meaning single. The owner is the sole proprietor. There are various pros and cons associable with sole proprietorship.
According to Wright (p.2), if one knows the implication of engaging a sole proprietorship, then the importance of opting for a corporation or a partnership business becomes clearer. This paper will form an analysis of the sole proprietorship type of business by critically assessing these advantages and disadvantages. The paper will assist in bringing into focus the characteristic that one would look for before a venture or a conclusive business decision.
Overview of Sole Proprietorship
Corporation of a business means that the firm’s ownership is through shares and therefore the venture is a partnership. On the other hand, Limited Liability Companies (LLCs) are firms that enjoy the advantages of both the corporations as well as partnership businesses (Wright, p.3).
Most family business ventures are partnerships between the family members or spouses. One key characteristic of sole proprietorship is that the administrative law does not differentiate between the owner and the firm. The legal matters such as the tax remittances are associable to the owner.
There is freedom of conducting transaction through personal identity or a trade name. The proprietor also has the freedom to choose the number of employees or contractors to hire, since the firm and the government has no right to dictate or influence hiring. This is for the reason that the law recognizes no difference between the owner and the enterprise. Sole proprietorship commences with the start of business transactions.
Advantages of Sole Proprietorship
Due to lack of distinction between the owner and the business, the law requires only a single form of tax remittance. Therefore, unlike corporations that pay the income tax separate from the domestic tax, the sole proprietor is able to avoid the double taxation (Jones p.2).
The government treats all the business income as personal income and thus there is no need to file corporate tax returns as well as the personal tax returns (Wright, p.2). Secondly, it is possible to deduct all the business losses to the family income such as the dividends, non-business earnings or interest gains (Ward, p.2). This causes a reduction on the income tax and thus assists during the initial stages of business transactions or during losses.
Disadvantages of Sole Proprietorship
Government does not differentiate the sole proprietor and the business; therefore, the owner is reliable of all the business debts and tax evasions and thus faces all charges as an individual (Ward, p.1). Personal assets or savings might be collateral to pay back for business related damages or losses.
Centrally incorporation means that the firm is responsible for the debts (Wright, p.5). When choosing a sole proprietorship, it is often advisable to shelter some assets against possible losses, for instance placing them under name of the spouse, who must be a separate entity to the business rather than joint tenant.
According to Jones (p.3), another measure of avoiding the sole proprietorship, related losses include insuring against possible risks. Secondly, there are possibilities of paying higher rates of income taxes whenever the income exceeds the $115,000 margins for single persons and $140,000 for the married (Jones p.3).
Contrary, it is possible to reduce the tax rates in case of a corporate firm. Finally, a sole proprietor is not able to deduct the life or health insurance while it is possible to file deductions up to $50, 000 from a corporate business with an insurance offer to its employees.
Personal decision to run either a corporate business or a sole proprietorship depends on one’s analysis of the pros and cons. Awareness of the requirements assists one to avoid possible consequences.
Jones, Thomas. Doing business as a sole proprietor. Poznak Law Firm Ltd. 2 April 2010. Web. 9 December 2010.
Ward, Susan. Small business: Canada. 17 August 2010. Web. 9 December 2010.
Wright, Kevin. Forms of business ownership. New York, NY: Harper Collins. 2009. Print.