Many small businesses begin as sole proprietorships. A single person owns and runs a sole proprietorship, and this sole proprietor has the rights to profits and assets of the business. Debts and liabilities are also the responsibility of the owner. Sole proprietorships are a great way to begin a business since they require very little money.

When you own a business, you are only taxed once. A sole proprietorship is not taxed as much as other business types. One person is the owner, so disagreements with other owners don't happen. It's also easy to end this type of business.

Sole Proprietorship Advantages

There are many advantages to having a sole proprietorship. For example:

  • This type of business costs the least and is simple to begin.
  • The sole proprietor has total control over the business and can make decisions that are best for the enterprise.
  • The sole proprietor owns all the income from the business and can reinvest or retain it.
  • The money that the business makes goes directly to the owner's personal tax return.
  • It's easy to end the business.

Sole Proprietorship Disadvantages

Disadvantages to having a sole proprietorship include:

  • Any debts that form are the responsibility of the sole proprietor. All personal and business assets are at risk.
  • They can only use money from consumer loans or personal funds to advance the business.
  • It might be difficult to attract high-quality employees.
  • Not all employee benefits are available in a sole proprietorship.

Tax Forms

Sole Proprietorship tax forms are:

  • Schedule SE: Self-employment tax
  • Form 1040: Individual Income Tax Return
  • Employment Tax Forms
  • Schedule C: Profit or Loss from Business (also called Schedule C-EZ)
  • Form 8829: Expenses for Business Use of Your Home
  • Form 1040-ES: Estimated Tax for Individuals
  • Form 4562: Depreciation and Amortization

To run a business of this type takes a special kind of person who can handle all the ins and outs of owning a business. The sole proprietor is completely responsible for all business decisions and raising money. Certain employee benefits cannot be completely deducted from the business's income. Sole proprietors need to be aware that some of the costs can be partially deducted later on taxes as an adjustment.

Partnerships

Another form of business ownership is a partnership. Two or more people can share the ownership of a business in a partnership. The law does not set apart partners and owners, just like proprietorships. With a partnership, there should be some kind of agreement so that both parties know what they are responsible for, as well as what each gets if the business were to end. The legal agreement should include who will make decisions, how profits will be distributed, how disagreements will be handled, how partners in the future will enter the business, and what the process is for partners being bought out.

Partners need to figure out how much each will spend on the business and the amount of time they will spend on the business. Partnerships can be formed with other individuals and businesses. It does not cost much to form a partnership, although tax and liability rules are different for partnerships. Think very carefully who to partner up with, since the entire company can be jeopardized if one partner makes a legal or financial mistake.

Partnership Advantages

Partnership advantages include:

  • Partnerships are simple to start but take time to properly grow.
  • The likelihood of successfully raising funds increases with partners.
  • The money made from the business goes directly to the personal tax returns of all partners.
  • Potential employees might be more interested in the business if they know they can become a partner in the future.
  • Partners who have compatible skills can help a business grow.

Partnership Disadvantages

Partnership disadvantages include:

  • Partners are responsible for each other.
  • Partners must equally share all profits.
  • Disagreements are likely because decisions are made together.
  • Employee benefits are not all deductible on business-related tax returns
  • The partnership is not guaranteed to last due to one of the partners leaving or dying.

There are several kinds of partnerships that can be chosen. One is a general partnership where everything is divided, which includes responsibility of management and reliability and loss or profit shared, unless otherwise noted in the initial agreement.

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