Depending on the nature of the business venture and number of people involved, an entity can be registered as a sole proprietorship, partnership, limited liability company, or corporations.
According to the Internal Revenue Service (IRS), A sole proprietor is someone who owns an unincorporated business by himself or herself. Sole proprietorship is a business that is owned by an individual, who is solely responsible for all the profits and debts associated with a business.
It is one of the least expensive forms of registration and provides an individual the absolute power to carry out the affairs of the organization. It has been estimated that more than 75% of all the businesses are registered as sole proprietorship.
Registering your business as a sole propriety is simple and this is done by obtaining the necessary licenses and tax identification numbers. You are taxed individually and the profit or loss that your firm registers is put up on your personal tax form.
► In sole proprietorship, the owner is in total control of the profits and losses, and can easily draw out a strategy in which the business would be conducted. As there is no legal binding with any party, the owner can make changes to his business immediately, without waiting for someone's approval.
► The legalities involved in the business like the tax declaration and the licensing is a smooth affair, and one can easily file his taxes under the required rules. The income is declared on the personal income tax forms, thus preventing the tedious process of maintaining numerous records as in case of corporations.
► In case one wants to dissolve the business, the process is relatively simpler.
► The owner has to raise all the capital involved in starting the business on his own. Apart from the initial start-up costs, it is also a bit difficult to keep the inflow of cash for expansion purposes.
► Sole proprietorship demands complete control from the owner, and if the structure of the company is not properly maintained, it can result into inaccurate financial statements which can prove fatal for the business.
It is similar to sole proprietorship in its formation, except that the profits and losses are shared by the owners of the business. There are several advantages and disadvantages of partnership, let us take a look at some of them.
For example, if a business venture requires $10,000 as the startup cost, and is owned by four individuals, then each one of them is responsible to raise only $2500. In times, when the business requires an inflow of capital, the avenues for raising capital are better.
► The onus of decision-making does not lie on any one individual, and in case a project fails to take off, one particular person is not blamed. Having more members can also bring in multiple solutions to a problem. Partnership also helps in better organization as work can be divided by the skills each member possesses.
There are times when you may not agree to a particular solution or may feel that there is a better way of dealing with a situation, but you may have to go with what the majority of your partners decide. This can make you liable for the actions and decisions of others as legally, you also are a part of the decision.
► The profits are shared equally, which can sometimes create friction among the partners. This means that individuals who are not putting in the required effort get the same benefits as someone who has worked really hard.
► Partnership has a limited life, and due to any reason if some partners decide to disassociate themselves from the business, uncertainty and unsuitability can mar the venture.
This was some information on sole proprietorship and partnership. As you can see that both these forms of businesses have their own advantages and disadvantages, so deciding which one is better or more beneficial is essentially an individualistic choice.