SOLE PROPRIETORSHIP A sole proprietorship, also known as a sole trader or simply a proprietorship, is a type of business of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. This means that the owner has no less liability than if they were acting as an individual instead of as a business. business. It is a "sole" proprietorship in contrast with partnerships.. partnerships A sole proprietor may use a trade name or business name other than his or her legal name. In many jurisdictions there are rules to enable the true owner of a business name to be ascertained. In the United States there is generally a requirement to file a doing business as statement with the local authorities.[1] In the United Kingdom the proprietor's name must be displayed on business stationery, in business emails and at business premises, and there are other requirements. [2] [edit edit]] Advantages The many advantages of corporations of corporations are described in that article; chiefly they are the ability to raise capital either publicly or privately, to limit the personal liability of the officers and managers, and to limit risk to investors. The disadvantages of corporations are advantages to proprietorship: proprietorship: reduced cost of a business, business, as corporations must do many things like purchasing, accounting, and legal actions in more expensive ways and are subject to special taxes and fees; easier and cheaper to start and discontinue without required fees and legal expenses; and easier management, particularly when a sole owner wishes to have exclusive control, as most corporations are required to be controlled by a board of directors of several persons. [edit edit]] Disadvantages Disadvantages Raising capital for a proprietorship is more difficult because an unrelated investor has less peace of mind concerning the use and security of his or her investment and the investment is more difficult to formalize; [3] other types of business entities have more documentation. As a business becomes successful, the risks accompanying the business tend to grow.[citation needed ] One of the main disadvantages disadvantages of sole proprietors is unlimited liability where the owner's personal assets can be taken away. This is particularly true for wrongdoing or liabilities created by employees; a corporation only partially shields an owner or officer for his own actions according to the principle piercing the the corporate veil . Sole proprietors also commonly end their business of piercing shortly, or lacking continuity. Also, being alone in business, business, sole proprietors generally have a lack of money which will lead to a failure in business. The small size of the business causes limited management skills because there are less people working together. As employees generally seek stable employers, small independent businesses that have a high chance of failing have more difficulty attracting skilled people. Certain business structures such as Limited Liability
Company allow shielding of personal assets, and sometimes, sometimes, favorable tax treatment, but there are disadvantages[4] and limitations[5] also. [edit edit]] Lending "Holding everything else constant, ... small corporations are less creditworthy than small noncorporate firms, because the former have only the corporation’s assets to back up business debt, while the latter have both the firm’s assets and the owner’s personal assets. Lenders also know that owners of small corporations can easily shift assets between their personal accounts and their corporations’ accounts, so that lenders may not view the corporate/noncorporate corporate/noncorporate distinction as meaningful for small firms. In making loans to small corporations, lenders therefore may require that owners personally guarantee the loans. This abolishes the legal distinction between corporations and their owners for purposes of the particular loan and puts the owner’s personal assets at risk to repay the loan."[6]
There are some things in life that you are allowed to be selfish about – your career, progress and happiness. For how long are you going to continue building and fulfilling another person’s dreams and visions? Perhaps you have even told yourself – “I can run things better than my boss,” or “I want t o build something for the future,” or “I want to do what gives me fulfillment.” These could be the motivation you need to start something for yourself! Why not? You’ve been able to get an education, training and experiences in your field spanning several years. Or you’ve got a hot idea or concept that the market needs. What about the downturn in the economy that has made a lot of job cuts and losses a reality in several industries? industries? Whatever the motivation – running your own business is really the best way to go. Of the several ways of getting into a business, sole proprietorship is really one of the most preferable. It is the simplest and most common form of business ownership. ownership. A sole proprietorship is basically a one-man business where one person is responsible for all aspects of the business. In other words, the buck stops on this one man’s table regarding the business. Sole proprietorship has several advantages: Decision making is vested in a single individual. This makes for flexibility; One-man organizations can take advantage of opportunities and adapt to change faster than other types of organizations; organizations; Chances of broken focus are minimized because the vision of the founder is followed ; Lower costs of startup. Lower costs of being in business; Lower taxes and other fees associated with being in business.
With this option anyone can start a business as entry requirements are minimal; A study of the most developed economies in the world such as Japan and the United States indicate that small businesses are a key indicator of economic growth; Many respected and successful organizations today actually started out first as sole proprietorships; and Resources can be more easily disbursed without the added hassle of multiple signatories, paperwork and documentation. However this is not to say that sole proprietorship is without its demerits, some of which are: Liability is unlimited. The organization and its owner are one and the same in the eyes of the law. This means should the enterprise fail, the founder would have to cough out funds from other sources to repay creditors; There is a high likelihood of lack of fiscal discipline among sole proprietors. Improper record keeping and lack of financial controls may run the business down; Because all authority is vested in one person, there is a possibility that if the person is not around nothing will get done and no decisions will be taken; Access to loans and new capital is harder for such businesses. Many investors prefer to invest in and deal with corporations. Sole proprietorship can really be a beautiful proposition due to the following reasons: 1. You now get to apply all you have gathered from your experiences in business for yourself; 2. Whatever you make is yours to keep, you don’t need to share it with anyone; 3. You can work where, when, how and whatever hours you want – you are accountable to only yourself; 4. Sole proprietors finally have the time to do things they’ve always loved but couldn’t do because of their employment. Traveling, spending time with family, taking up social work are just some examples; 5. You now have a chance to build something that outlives its founder and makes your life more worthwhile and meaningful; 6. Finally you’ve discovered an opportunity or a need that you believe you can fill. It is important to also note that there are certain attributes and characteristics that anyone intending to be a successful sole proprietor must have. They include:
Discipline, especially over money and finances; Desire to learn and adopt new ways of doing things; Being highly organized; Motivated; Passionate about the business; Committed to its continued growth; Willing and ready to make personal sacrifices for the continued growth of the business; Always on the lookout for improvement; Thrives on challenges and solving problems; Is not afraid to fail, fall and start over. Fortunately one is not born with any of these traits. The good news is they can all be learned and developed. Today many people are getting tired of working for someone else and branching out on their own to find fulfillment and satisfaction!
Sole proprietorship is a business structure for individuals who work for themselves, often on a freelance basis. Although it does not require formal incorporation and you do not have a board of directors, a sole proprietorship lacks the legal protection of an incorporated business. Function 1.
Becoming a sole proprietor is the easiest way to establish a one-person small business. Types
2. Freelance writers, copy editors, photographers and craftspeople might choose to run their businesses as a sole proprietorship. Features 3. A sole proprietor status is desirable for two primary reasons. First, there are no required start-up costs, although business licenses or town permits might be advisable. Second, there are no additional tax forms, as sole proprietors include business income on their individual tax return (Schedule C of Form 1040). As self-employed individuals, sole proprietors are subject to the self-employment tax.
Read more: Example of a Sole Proprietorship Business | eHow.com http://www.ehow.com/facts_4912530_example-sole-proprietorshipbusiness.html#ixzz1G06HC0Vo DOING BUSINESS AS A SOLE PROPRIETOR The sole proprietorship is perhaps the most common form of business ownership. Conducting business as a sole proprietor has distinct advantages and disadvantages. You should be aware of these characteristics, as they can have a significant impact on your business. Please note that brief references appear in this article to corporations, another form of business ownership. What is a sole proprietorship? A sole proprietorship is an unincorporated business owned by one person (hence, the term sole). The owner of a sole proprietorship is known as a sole proprietor. If you conduct your business through a corporation, your business will not be a sole proprietorship. If you share ownership of your business with someone else, including your spouse, your business will not be a sole proprietorship. The most important feature of a sole proprietorship is that the law makes no distinction between you, the sole proprietor, and your business. Virtually all the legal and tax consequences associated with sole proprietorships flow from this essential element. As a sole proprietor, you can conduct business under your own name or under a trade name. For example, let's say I am a plumber. I can conduct business under my own name, Jim Poznak, Plumber. Or, I can conduct business under a trade name, such as EZ Flush. (Before using a trade name, you should read my article regarding trademarks, which appeared in the February, 1994, issue of Home and Small Business Reporter.) In either case--whether you conduct business under your own name or under a trade name--if you are the sole owner of an unincorporated business, your business will be a sole proprietorship, and you will be the sole proprietor. A sole proprietorship can hire any number of employees. Because the law makes no distinction between you, the sole proprietor, and the business, you are not considered an employee. Sole proprietorships may also hire any number of independent contractors. (The difference between employees and independent contractors will be discussed in a future article.) Whether you have zero or 100 employees (or independent contractors) makes no difference. If you are the sole owner, your business will still be a sole proprietorship. Starting business as a sole proprietorship Your sole proprietorship exists as soon as you start doing business. Let's return to our plumber example. As a plumber, my sole proprietorship starts to exist as soon as I do my first plumbing job. Consequently, the legal and tax implications
of doing business as a sole proprietorship will also exist as soon as I do my first work as a sole proprietor. The advantages of doing business as a sole proprietor Conducting business as a sole proprietor brings two tax advantages. These advantages arise because the law makes no distinction between you and your business. The first advantage is avoidance of double tax. What, you may ask, is double tax? Basically, double tax can occur if you conduct your business through a corporation rather than through a sole proprietorship. Corporations pay income tax separately from their owners. Double tax can occur when you (through your personal tax return) and your business (through its corporate tax return) must both pay taxes on the same dollar of income. We will examine the double tax problem more closely in the next issue of the Home and Small Business Reporter. For now, you simply need to know that as a sole proprietor, you will not pay double tax on your business income because the law make no distinction between you, the sole proprietor, and your sole proprietorship. All your 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 gains from the sale of nonbusiness property. Furthermore, if you are married and file a joint tax return, your business losses will also offset your spouse's income. Your ability to deduct losses as a sole proprietor may reduce your family's total income tax burden and may be particularly useful during a startup or downturn phase of your business. The above tax advantage involving business losses is perhaps best illustrated by looking at your 1993 U.S. individual income tax return (Form 1040). I know--you hoped you'd never have to look at it again! But trust me, this will be a short, helpful exercise. First, look at Line 12 on your Form 1040. Line 12 instructs you to report the income or loss from your business. It also requires you to attach Schedule C. Now, compare the amount of income or loss that you reported on Line 12 with Line 31 from Schedule C. They are the same! Look at Schedule C again. The amount on Line 31 (and thus on Line 12) is the amount of your gross business income or loss (Schedule C, Line 6) minus your total business expenses (Schedule C, Line 28). Class, the exercise is over. You may put your Form 1040 back in storage. The disadvantages of sole proprietorships In the "real world," every action has a reaction. In the "legal and tax world," every advantage has a disadvantage. The principle disadvantage of sole proprietorships is that you, the sole proprietor, are personally liable for all the debts of your sole proprietorship. The reason for this is, once again, the law makes no distinction between you, the sole proprietor, and your sole proprietorship. For an example, let's again assume that I am a plumber. While attempting to fix a pipe, I accidentally flood my customer's basement with sewage. I am personally
liable for the damages caused by the flooding. This means that my customer can look to all of my personal and business assets to pay for the damage, including my bank accounts, my vehicles, my equipment, and perhaps even my house! You can reduce your personal liability in several ways. If you are married and own your home with your spouse, you can shelter your house from personal liability by holding title with your spouse as tenants by the entirety rather than as joint tenants. You might also try to get a release from your customers. For example, as a plumber before starting on a job, I would ask my customers to sign a paper saying that they would not hold me responsible for any damage I cause, including damage caused by my negligence. Of course, customers may not want to sign such a release and you may not even want to ask for it. Another way may be to purchase insurance to cover potential damages, which you should do whenever possible. However, insurance may be costly, and not every risk is insurable. The best way to avoid personal liability may be to incorporate your business. This will be discussed in more detail next month. A second disadvantage of conducting business as a sole proprietorship is that you may pay higher income taxes. I am sure you remember that as a sole proprietor you report your business income on your personal tax return (Line 12 on the 1040 again). While you do avoid double tax this way, if as a single person your total adjusted gross income exceeds $115,000, or as a married person filing jointly your adjusted gross income exceeds $140,000 , you may pay income tax at the highest rate. By incorporating your business, you may be able to reduce your tax rate. As a sole proprietor, you face two additional disadvantages. Starting in 1994, you cannot take any tax deduction for your health or life insurance. There is no good reason for this; the Internal Revenue Code just does not allow sole proprietors to take the deductions. A full deduction for your health insurance and a deduction for a $50,000 life insurance policy is available to corporations, so long as all employees of the corporation are offered the insurance. If these deductions will save you enough money, you may want to incorporate your business. Conclusion Every business is different. What may be advantageous to you may be disadvantageous to someone else. However, because significant tax and legal repercussions flow from your decision to conduct your business as a sole proprietor, you should be aware of them. By being aware, you can best avoid unexpected and unintended consequences.
Getting ready to start your own business? You've got a bunch of different choices as to the entity type, including forming a corporation or a limited liability company. But don't make the mistake the over-looking the sole proprietorship option. For new entrepreneurs starting a small business, a sole proprietorship offers five big benefits. Reason #1: Setup Simplicity
Here's a first reason to start your new business as a sole proprietorship: It's easy. In fact, you actually don't need to do anything to "start" your new business as a sole proprietorship. By starting your business, you create your sole proprietorship. Period. Note that state and local governments typically do want to license businesses, however, including businesses operating as sole proprietorships. Do check out the local phone book or search your state government's web site for licensing information related to starting a business like yours. Reason #2: Easy Tax Accounting Easy tax accounting counts as a second reason to use a sole proprietorship. As compared to corporations and partnerships, a sole proprietorship keeps your tax accounting simple. A sole proprietorship reports its income and deductions to the federal and state government using a one-page tax form, a Schedule C. The Schedule C tax form, available from the http://www.irs.gov web site, is essentially a simplified profit and loss statement. Note that many small corporations, limited liability companies and partnerships need to include balance sheets as part of their tax returns. And balance sheets greatly complicate a small business's accounting and the tax return. Reason #3: Hiring the Proprietor's Children A third reason to consider the sole proprietorship option: A sole proprietor who wants to hire his or her minor children often saves a bundle on taxes. Here's why: The sole proprietor who hires his or her minor children (under the age of 18) can deduct the amounts paid to the kids as wages. Yet the wages typically aren't taxable to the kids. (The actual rule is that the wages aren't taxable as long as the children make less than the standard deduction amount-roughly $5,000 a year.) And it gets even better: These wages typically don't ratchet up the business's payroll taxes because wages paid to minor children aren't subject to Social Security, Medicare and Federal Unemployment taxes. Note: A successful sole proprietor with kids who help out in the business could easily save between $1,000 and $2,000 a year per child by using this tax loophole. Reason #4: Easier Self-employed Health Insurance Deductions A fourth reason to use a sole proprietorship concerns the self-employed health insurance deduction. A sole proprietor can usually easily use his or her health insurance as an income tax deduction.
Furthermore, with a bit of extra paperwork, in some situations, a sole proprietor employing a spouse may be able to deduct all medical expenses as business tax deduction. To deduct all of the proprietor's family's medical expenses as a business tax deduction, the sole proprietor needs to set up something called a healthcare reimbursement arrangement. (Get your accountant's help if you want to do thisthe setup process can be a bit tricky and traps exist for the unwary.) Note: Corporations, partnerships and limited liability companies can deduct selfemployed health insurance, too. But taking the deduction often gets tricky for small corporations, limited liability companies and partnerships and may be impossible for these sorts of entities. (You can consult your tax advisor for the details.) Reason #5: Easy Upgradeability A fifth, final reason to use a sole proprietorship-you can easily later upgrade to a corporation, limited liability company or partnership. Specifically, you can typically turn your sole proprietorship into a partnership or corporation without tax consequences at some point in the future if circumstances warrant. Accordingly, if at some point in the future, you need to bring in partners or you want to reduce your legal liability by forming a corporation or limited liability company, you should be able to easily do so. (Ask your attorney or accountant for the details.) 1 - Taxes When you start a sole proprietorship, you are going to be able to take advantage of a simple tax situation. You are not going to have to file separate business taxes as you would if you started some type of corporation. You are simply going to file all of the taxes as they are personal taxes. 2 - Simple Formation With a sole proprietorship, you are going to be able to form your business very easily. You are not going to have to fill out complicated documents or hire a lawyer as you would with some type of corporation. This makes it much more simple to get started. 3 - Avoid Bureaucracy Corporations are closely regulated by the government and have strict accounting standards that they have to abide by. The profit from corporations is also taxed twice. With a sole proprietorship, you are not going to have to worry about any of this. The profit is only going to be taxed once and you will not have to do with a lot of complicated accounting. Why do some entrepreneurs choose the sole proprietorship type of entity and others do not? Is a sole proprietorship type of business entity right for me? What
are the pros and cons of operating a sole proprietorship kind of business? If you have ever asked yourself any of such questions, then read on as I spill every detail you need to know about doing business as under the sole proprietorship entity. Statistics reveal that over 75% of all existing businesses are operated under the sole proprietorship type of business entity. What is responsible for such high rate of sole proprietorship business startups? You’re going to find out soon. In this article, I am going to reveal the pros and cons of running a sole proprietorship type of business. After reading this article, you are going to know and decide if a sole proprietorship type of business entity will suit your business. Now what is sole proprietorship? A sole proprietorship business is a business owned and operated by an individual. It’s a business that exist as the individual; not a separate entity. In fact, in this type of business; the owner is the business. Businesses operated under the sole proprietorship are usually named after the owner. For example, Mary's Tea shop, Tony's Grocery, Martins' Fast food, Ajaero Auto Repair and so on. Now why do entrepreneurs choose the sole proprietorship type of entity? Why do people start businesses in their own name? What are the advantages of running a business under a sole proprietorship type of entity? You are going to find out the answers below. Many small business owners, mom and pop businesses operate under the sole proprietorship type of business entity for the following reasons. Advantages of doing business as a sole proprietor
1.
You will be your own boss
Many a time, I have heard statements from aspiring entrepreneurs such as "I want to be my own boss” or “I want to do things my way." Small business owners always feel good being in charge; they love being responsible for themselves and not taking orders from anyone. That’s why most small businesses are operated under the sole proprietorship type of entity. 2.
The business owner keeps all the profits
This is another reason why many entrepreneurs choose the sole proprietorship form of business. The proprietorship type of business entity allows the business owner or entrepreneur to keep 100% of the profit. 3.
Freedom to do their own thing
Most entrepreneurs love the sole proprietorship type of business entity because it allows them to freely express themselves. They can showcase their talent, skill, expertise and still get acknowledgement for it. Entrepreneurs under this
category are usually called the “do it yourself-ers” because they love doing things their own way. Under this umbrella, you will find entrepreneurs who are barbers, hair dressers, painters, etc. In fact, they are the self employed of the society. 4. Another advantage of doing business as a sole proprietor is that you don't have to prepare financial statements for anyone. Since you own 100% of the business, then you are not accountable to anyone. There will be no external auditing of your business account and you are under no obligation to report your business earnings or financial position. 5. When you are a sole proprietor, you have the ability to quickly make and implement decisions. Flexibility is the name of the game in a sole proprietorship kind of business. 6. When you are doing business as a sole proprietor, you have almost none or less paper work and legal restrictions. 7. If you choose to run your business under the sole proprietorship for of entity, then you can cease to operate or close down the business without any legal formalities.
Why sole proprietorship is most common, simplest business type May 30, 2007|By AllBusiness.com
The most common and simplest form of business is a sole proprietorship. An individual proprietor owns and manages the business and is responsible for all transactions. The owner is also responsible for all debts and liabilities. A sole proprietor can own the business for any duration of time and sell it when he or she sees fit. As owner, a sole proprietor can even pass a business to heirs. In this type of business, there are no specific business taxes paid by the company. The owner pays taxes on income from the business as part of personal income tax payments. Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. The paperwork and formalities, however, are substantially less than those of corporations, allowing sole proprietors to open a business quickly and with relative ease -- from a bureaucratic standpoint. It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors. Advantages -- A sole proprietor has complete control over the business. -- Sale or transfer can take place at the discretion of the sole proprietor.
-- No corporate tax payments. -- Minimal legal costs to forming a sole proprietorship. -- Few formal business requirements. Disadvantages -- The sole proprietor of the business can be held personally liable for the debts and obligations. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. -- All responsibilities and business decisions fall on the shoulders of the sole proprietor. -- Others won't usually invest in sole proprietorships. Note: If the business is conducted under a fictitious name, it's up to the sole proprietor to file all applicable forms under the fictitious name or under doing business as (DBA). This, however, does not mean that the business is a separate entity from a legal standpoint. The sole proprietor remains liable even if doing business under a fictitious name. Most sole proprietors rely on loans and personal assets to initially finance their business. Some will elect to incorporate once the business has started to grow, while other business owners maintain their sole proprietorship for many years. What is a sole proprietorship? -- Ownership rules: A sole proprietorship has one business owner. -- Personal liability: Proprietor has unlimited liability for the obligations of the business. -- Tax treatment: Business entity is not taxed, as the profits and losses are passed through to the sole proprietor. -- Key documents: DBA filing, business license if required by city or county. -- Management: Sole proprietor manages the business. -- Capital contributions: Proprietor contributes the capital needed. Pay your quarterly taxes The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don't pay estimated tax each quarter, Uncle Sam can charge interest and impose penalties. As long as you earn income in a given quarter, you owe tax for that quarter. You must pay federal income tax, along with Social Security and Medicare taxes, known collectively as self-employment tax. The income tax you pay is based on your adjusted gross income.
A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies by country and by industry, ranging from fewer than 15 employees under the Australian Fair Work Act 2009, 50 employees in the European Union,[citation needed ] and fewer than 500 employees to qualify for many U.S. Small Business Administration programs.[1] Small businesses can also be classified according to other methods such as sales, assets, or net profits. Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online business, such as webdesign and programming, etc. Advantages A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity. Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses.[citation needed ] Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors. [3] However, entrepreneurs have to work very long hours and understand that ultimately their customers are their bosses. Several organizations, in the United States, also provide help for the small business sector, such as the Internal Revenue Service's Small Business and SelfEmployed One-Stop Resource. [4] Disadvantages Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have no less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's
debt should he end up in bankruptcy court, under the theory of undercapitalization. In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem. In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.[5] Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly. Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Marketing Finding new customers is the major challenge for Small business owners. Small businesses typically find themselves strapped for time but in order to create a continual stream of new business, they must work on marketing their business every day. Common marketing techniques for small business include networking, word of mouth, customer referrals, yellow pages directories, television, radio, outdoor (roadside billboards), print, email marketing, and internet. Electronic media like TV can be quite expensive and is normally intended to create awareness of a product or service. Many small business owners find internet marketing more affordable. Google AdWords and Yahoo! Search Marketing are two popular options of getting small business products or services in front of motivated Web searchers. Successful online small business marketers are also adept at utilizing the most relevant keywords in their site content. Advertising on niche sites can also be effective, but with the long tail of the internet, it can be time intensive to advertise on enough sites to garner an effective reach. Creating a business Web site has become increasingly affordable with many doit-yourself programs now available for beginners. A Web site can provide significant marketing exposure for small businesses when marketed through the Internet and other channels. Some popular services are WordPress, Joomla and Squarespace. Social media has proven to be very useful in gaining additional exposure for many small businesses. Many small business owners use Facebook and Twitter as
a way to reach out to their loyal customers to give them news about specials of the day or special coupons and generate repeat business. The relational nature of social media, along with its immediacy and 24-hour presence lend intimacy to the relationship small businesses can have with their customers, while making it more efficient for them to communicate with greater numbers. Facebook ads are also a very cost-effective way for small businesses to reach a targeted audience with a very specific message. In addition to the social networking sites, blogs have become a highly effective way for small businesses to position themselves as experts on issues that are important to their customers. This can be done with a proprietary blog and/or by using a backlink strategy wherein the marketer comments on other blogs and leaves a link to the small business' own Web site. A solid public relations strategy that utilizes speaking engagements, press releases, feature stories, events and sponsorships can also be a very costeffective way to build a loyal following for a small business. Bankrupcy When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy. [edit] Certification and trust Building trust with new customers can be a difficult task for a new and establishing business. Some organizations like the Better Business Bureau and the International Charter now offer Small Business Certification, which certifies the quality of the services and goods produced and can encourage new and larger customers. These services may require a few hours of work, but a certification may reassure potential customers.[citation needed ] [edit] Contribution to the economy In the US, small business (less than 500 employees) accounts for around half the GDP and more than half the employment. Regarding small business, the top job provider is those with less than 10 employees, and those with 10 or more but less than 20 employees comes in as the second, and those with 20 or more but less than 100 employees comes in as the third (interpolation of data from the following references). [6] The most recent data shows firms with less than 20 employees account for slightly more than 18% of the employment.[7] Of the 5,369,068 employer firms in 1995, 78.8 percent had fewer than 10 employees, and 99.7 percent had fewer than 500 employees. [8] [edit] Sources of funding
Small businesses use several sources available for start-up capital:[9] •
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Self-financing by the owner through cash, equity loan on his or her home, and or other assets. Loans from friends or relatives Grants from private foundations Personal Savings Private stock issue Forming partnerships Angel Investors Banks SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans
Some small businesses are further financed through credit card debt - usually a poor choice, given that the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business. The SBA also requires business owners to pledge personal assets and sign as a personal guarantee for the loan. Canadian small businesses can take advantage of federally funded programs and services Business Networks Small businesses often join or come together to form organizations to advocate for their causes or to achieve economies of scale that larger businesses benefit from, such as the opportunity to buy cheaper health insurance in bulk. These organizations include local or regional groups such as Chambers of Commerce, as well as national or international industry-specific organizations. Such groups often serve a dual purpose, as business networks to provide marketing and connect members to potential sales leads and suppliers, and also as advocacy groups, bringing together many small businesses to provide a stronger voice in regional or national politics.
Sole Trader Advantages The advantages of being a sole trader are immense not lease because the owner has full control over the business for daily operations as well as how large they wish to grow it. It's easy to set yourself up as you only need to declare to yourself you are going to be a business but also have to inform t he Inland Revenue you are self employed within 3 months of starting the business. A sole trader does not need to complete many of the forms and accounting information that limited companies need to produce although accounts should be developed when preparing for your annual self assessment tax return where you declare your annual profits and tax liability.
As there are no staff on hand the owner also takes all of the profits made by the business and all financial information is kept private (whereas limited companies need to file accounts each year at companies house). You don't need to register a company either and can be known as almost anything and most people have businesses that are "trading as". Decision making is also fast as it's just the owner who decides where the business is heading and whether or not to undertake any work and where and when they will work. They are generally closer to their customers and offer a more personalised approach and improved customer service as they are the person each customer has contact with. Accountants generally charge less for company accounts and advice because there is less work to undertake. You just need to complete a profit and loss account rather than a balance sheet and cash flow (although it's worth preparing these last 2 on a regular basis to manage your business). Sole Trader Disadvantages The main disadvantage is that you, as the owner of the business, are solely liable for any consequences of business failure or any other liability for example injuring a customer or property damage although these can be mitigated against with public liability insurance. It may also be quite difficult to get larger jobs not only because large corporations have many staff that can work on tenders and offers but because most organisations won't work with a business that only has a staff of one. It can also be time consuming following up on tenders that ultimately don't come to fruition. You may also need to think about what would happen if you as the business owner were to become sick or had an accident so you couldn't work. Although critical illness insurance is available some times it doesn't start to pay until after one month and it is unlikely to be at the levels of profits the business is making but it is certainly worth considering. Tax VAT and Liability Sole traders still need to properly account for all sales, expenses and profits for any income tax and national insurance liabilities on a yearly basis. The VAT rules still apply if the turnover of the business exceeds the limit set by HMRC. As mentioned above, a sole trading business has unlimited personal liability rather than the liability forming against a company and their directors. If the business can not pay creditors they may have to sell their own personal assets to meet their demands such as their house. Advantages of Sole Proprietorship The biggest advantages of a sole proprietorship is that you are your own boss and have no one to answer to. You have the freedom to do what you deem fit,
and you alone reap the rewards of your toil, or when you make mistakes, it is up to you and only you to tend to those mishaps. There is pride in owning an independent business that no one can take away from you. If you set up the sole proprietorship business well and run it well, you can create a legacy to pass on to your children or family. The biggest advantage of sole proprietorship, however is the no-hassle nature of operations. A sole proprietorship requires no additional paperwork or regulatory compliance. Public limited companies and corporations, for instance, are required to hold regular board meetings and file periodic reports and statement of accounts. The sole proprietorship can do as it pleases, and if it wants to, can even run without maintaining any accounts. All the profit that stems from a sole proprietorship is that of the entrepreneur and is included with the entrepreneur's income tax returns, without having to file a separate income tax return for the business. In addition, the sole proprietor can write off almost any expense as part of business expenses, thereby reducing the tax liability. A corporation, on the other hand has to file separate returns and depending on the type of entity may have to pay separate tax on profits depending on percentage of ownership or shares. Another big advantage of sole proprietorship is the easy exit route. You can close the business anytime you want to if you do not feel comfortable with it, as long as you complete any commitments that you have made during the course of the business. Closing down a partnership or a corporation, on the other hand is a complex affair and requires the support and cooperation of other business partners. Disadvantages of Sole Proprietorship There are also disadvantages of sole proprietorships. The biggest danger of sole proprietorships is unlimited liability. A sole proprietorship does not distinguish between the entrepreneur's personal assets and the business assets, and any liabilities that arise during the course of the business considers personal assets and income of the entrepreneur. Such risks become a major issue as the business grows and becomes increasingly visible. The only means to side step such issue is to switch over from a sole proprietorship to other business models such as Limited Liability Company (LLC) or an S Corporation. Another major difficulty is raising capital. A sole proprietor's ability to raise capital depends solely on the merit of personal financial standing. A corporation can pledge its shares to obtain the necessary finances. An associated disadvantage of sole proprietorship is the limited tax deductions for sole proprietor business. The sole proprietorship cannot, for instance, take advantages such as setting off insurance amounts from income tax computations that is available for corporations. A review of the pros and cons of a sole proprietorship reveals that sole proprietorships ideally suit small businesses with little risks. As the business grows and acquires critical mass, it becomes better to switch to some other business model.
Reference University of Richmond. "Sole Proprietorships." Retrieved from http://law.richmond.edu/about/centers/ip-clinic/business-sole-proprietorship.pdf on 03 March 2011.
Read more: http://www.brighthub.com/office/entrepreneurs/articles/44202.aspx#ixzz1G0dLW r5b Sole Proprietorship
The sole proprietorship is the oldest, most common, and simplest form of business organization. A sole proprietorship is a business entity owned and managed by one person. The sole proprietorship can be organized very informally, is not subject to much federal or state regulation, and is relatively simple to manage and control.
The prevalent characteristic of a sole proprietorship is that the owner is inseparable from the business. Because they are the same entity, the owner of a sole proprietorship has complete control over the business, its operations, and is financially and legally responsible for all debts and legal actions against the business. Another aspect of the "same entity" aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.
A sole proprietorship is a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and does not justify the expenses of incorporating and ongoing corporate formalities.
CHOOSING AN APPROPRIATE FORM OF BUSINESS REQUIRES CAREFUL CONSIDERATION OF ISSUES COVERED IN THIS GUIDE AS WELL AS OTHERS NOT DISCUSSED. THIS GUIDE ONLY PROVIDES BASIC INFORMATION ON SOME OF THE LEGAL AND PRACTICAL ISSUES TO CONSIDER WHEN SETTING UP A BUSINESS. IT IS MERELY DESIGNED TO ASSIST PROSPECTIVE ENTREPRENEURS IN THE EARLIEST STAGES OF BUSINESS DEVELOPMENT. THE GUIDE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. PERSONS CONTEMPLATING STARTING A BUSINESS ARE STRONGLY ENCOURAGED TO CONSULT LEGAL, FINANCIAL AND TAX ADVISORS. FIND AN ATTORNEY THROUGH THE IOWA STATE BAR ASSOCIATION'S ATTORNEY REFERRAL SERVICE.
Sole Proprietorship - Points to Consider •
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Easiest type of business organization to establish. There are no formal requirements for starting a sole proprietorship Decision making is in direct hands of owner. All profits and losses of the business are reported directly to the owner's income tax return. The startup costs for a sole proprietorship are minimal. Owner has unlimited liability. Both the business and personal assets of the sole proprietor are subject to the claims of creditors. Because a sole proprietorship is not a separate legal entity, it usually terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organizations. It is difficult for a sole proprietorship to raise capital. Financial resources are generally limited to the owner's funds and any loans outsiders are willing to provide. Owner could spend unlimited amount of time responding to business needs.
Sole Proprietorship - Procedural Aspects •
There are no Iowa statutes governing the formation of a sole proprietorship.
Sole Proprietorship - Key Attributes •
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Creation (minimum requirements) - No Formalities for creating a sole proprietorship. Profits / Losses / Distributions - Owner may use all profits and losses for business. Liability - Owner faces unlimited personal liability. Capital / Financing - All capital obtained from owner or through loans based on owner's creditworthiness. Duration - Usually no continuity upon disability, retirement or death of owner. Transfer of Ownership - Assets may be sold in entirety or in part. Management and Control - Owner manages and controls the company. Taxation - The business does not file or pay taxes. Reporting Requirements - None. Fees - None.
SOLE PROPRIETORSHIP The simplest form of business is the sole proprietorship, a business owned and operated by one individual. You can operate a sole proprietorship under your own name, or under another name you've chosen (as long as you don't add any of the legal designations of other forms of business, such as Ltd. or Inc.) There are a lot of advantages to sole proprietorships. One of the biggest advantages of a sole proprietorship is that setting up and administering the business is comparatively easy and inexpensive. For instance, in most provinces, if you choose the sole proprietor form of business ownership
and operate it under your own name, you don't even have to register your business. (Note that while the basic procedure for setting up a business is the same, no matter what part of Canada you live in, the details are different in each province and territory. For start up information for particular provinces, such as business registration procedures for each form of business, see the Business Registration section of this website. And even if you do have to register your sole proprietorship with your province or territory, it's a lot more inexpensive to register than a corporation. Nor do you have to make annual filings when you run a sole proprietorship (although in some provinces, such as Ontario, you have to renew your sole proprietorship business registration every five years). Another of the big advantages of the sole proprietorship form of business ownership is the tax simplicity. As a sole proprietor, you declare your business income on your personal income tax form, rather than having to file a separate tax form, (as you would have to do if you chose the corporate form of business ownership). To many small business owners, however, the best advantage of the sole proprietorship is that as a sole proprietor, you own 100% of your business. You’re the one that runs your small business and no one else can tell you what to do or how to do it. Disadvantages of Sole Proprietorships What appears to be an advantage at first look can also be a serious disadvantage. When it comes to disadvantages of sole proprietorship, the sole ownership aspect can be disastrous if things go badly. If you set up your business as a sole proprietorship, legally your business is considered to be an extension of yourself, meaning that you assume all responsibilities for the business. This means that as a sole proprietor, you are personally responsible for all the debts and liabilities of your business. So if your business fails, any of your assets, including your personal assets, can be seized and used to discharge the liability you’ve incurred. This personal liability is the biggest disadvantage of choosing to operate as a sole proprietorship. Other disadvantages of sole proprietorships include a lack of tax flexibility, the increased difficulty of raising money and the potential for weak management if the sole owner doesn't have all the skills or knowledge necessary to lead the company well. Let's look at your other choices of forms of business ownership. for legally structuring your business. Continue on to the next page to read about the advantages and disadvantages of the partnerships form of business.
References
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^ http://www.dbaform.com/faqs-dba.php#986 ^ Companies House Booklet GP1, Chapter 10 ^ Family Business Sourcebook , Aronoff, Astrachan, and Ward ^ http://www.limitedliabilitycompanycenter.com/llc_disadvantages.html LLC Disadvantages ^ http://www.yourlegalcorner.com/articles.asp?cat=llc&id=41 Can anyone form a California LLC? No.
^ a b Small Business Administration. Size Standards. See Summary of Size Standards by Industry. ^ Small Business Health Care Tax Credit for Small Employers. IRS. ^ Longenecker, Justin G.; Carlos W. Moore, J. William Petty, Leslie E. Palich (2008) (Casebound). Small business management : launching and growing entrepreneurial ventures. (14th ed.). Cengage Learning. p. 768. ISBN 0324569726. OCLC 191487420. ^ "Small Business and Self-Employed One-Stop Resource". Irs.gov. 2010-1025. http://www.irs.gov/businesses/small/ . Retrieved 2010-11-13. ^ [1][dead link ] ^ The Small Business Economy - A Report to the President: 2001 pg. 84 - Table A.3 (the last time data was granular enough for the figures for less than 10 employees was 1998) ^ "U.S. Small Business Administration Office of Advocacy: The Small Business Economy 2008, A Report to the President" (PDF). http://www.sba.gov/advo/research/sb_econ2008.pdf . Retrieved 2010-11-13. ^ "Office of Advocacy - U.S. SBA - Characteristics of Small Business Employees and Owners" (PDF). http://www.sba.gov/advo/stats/ch_em97.pdf . Retrieved 201011-13. ^ "Funding Sources for Small Business". Scorerochester.org. http://www.scorerochester.org/help/funding/sources.php . Retrieved 2010-11-13. ^ By STEVE LOHR Special to The New York Times (1980-01-15). "Steve Lohr, "Small-Business Forces Unite; Meeting Drafts Proposals For Carter Memories of Earlier Gatherings Small-Business Forces Unite", ''The New York Times'', Special, Jan. 15, 1980, Business & Finance, Page D1". Select.nytimes.com. http://select.nytimes.com/gst/abstract.html? res=F40C1FFA3E5C12728DDDAC0994D9405B8084F1D3 . Retrieved 2010-11-13.
