7 Types of Sole Proprietorship You Should Know
Are you thinking of starting a business as a sole proprietor? If so, you might be wondering what are the different types of sole proprietorship and how they affect your legal and tax obligations. In this article, we will explain the main characteristics and advantages of each type of sole proprietorship, and help you decide which one is best for your situation.
A sole proprietorship is the simplest and most common form of business ownership. It means that you own and run the business by yourself, without any partners or shareholders. You are responsible for all the profits and losses, as well as the debts and liabilities, of your business. You also have complete control over the management and operation of your business.
However, not all sole proprietorships are the same. Depending on your location, industry, and preferences, you can choose from different types of sole proprietorship that offer different benefits and drawbacks. Here are the seven main types of sole proprietorship you should know:
General Sole Proprietorship
This is the default type of sole proprietorship that applies to most businesses that do not register as a different entity. A general sole proprietorship is easy to set up and maintain, as it does not require any formal paperwork or fees. You just need to obtain any necessary licenses or permits for your business activity, and report your income and expenses on your personal tax return.
The downside of a general sole proprietorship is that it does not provide any legal protection for your personal assets. This means that if your business is sued or goes bankrupt, your creditors can go after your personal property, such as your house, car, or bank account. Therefore, this type of sole proprietorship is suitable for low-risk businesses that do not have a lot of debt or liability.
Limited Liability Company (LLC)
An LLC is a hybrid type of sole proprietorship that combines some features of a corporation and a partnership. An LLC allows you to separate your personal and business assets, which means that you are not personally liable for the debts and obligations of your business. However, unlike a corporation, an LLC does not have to follow complex rules and regulations, such as holding annual meetings or filing annual reports.
To form an LLC, you need to file articles of organization with your state and pay a filing fee. You also need to create an operating agreement that outlines how you will run your business, such as how you will distribute profits and losses, make decisions, and resolve disputes. You can choose to be taxed as a sole proprietorship, a partnership, or a corporation, depending on what is best for your situation.
An LLC is a good option for businesses that want to enjoy limited liability protection without sacrificing flexibility and simplicity. However, an LLC may have higher costs and more paperwork than a general sole proprietorship. Also, some states may impose additional taxes or fees on LLCs.
Professional Sole Proprietorship
A professional sole proprietorship is a special type of sole proprietorship that applies to certain professions that require a license or certification from the state, such as lawyers, doctors, accountants, architects, engineers, etc. A professional sole proprietorship allows you to practice your profession under your own name, without forming a separate entity.
A professional sole proprietorship has similar advantages and disadvantages as a general sole proprietorship. It is easy to set up and maintain, but it does not protect your personal assets from your business liabilities. However, some states may limit the liability of professional sole proprietors for malpractice claims by their clients or patients.
A professional sole proprietorship is suitable for licensed professionals who want to operate independently and do not need to share their profits or responsibilities with others.
Doing Business As (DBA)
A DBA is not a separate type of sole proprietorship, but rather a way to use a different name for your business than your own name. For example, if your name is John Smith and you want to run a bakery called Sweet Treats, you can register a DBA for Sweet Treats with your county or state.
A DBA allows you to create a more distinctive and memorable name for your business that reflects your brand identity and attracts customers. It also helps you avoid confusion with other businesses that may have similar names.
However, a DBA does not change the legal status or structure of your business. You are still a sole proprietor with full responsibility for your business income and expenses, as well as your personal assets.
Home-Based Sole Proprietorship
A home-based sole proprietorship is a type of sole proprietorship that operates from your home or another residential property. Many people choose to start a home-based business because it offers convenience, flexibility, low overhead costs, and tax benefits.
To run a home-based sole proprietorship, you need to comply with the zoning laws and regulations of your local government. You may also need to obtain special permits or licenses for your business activity, such as health, safety, or environmental permits. You also need to keep your personal and business expenses separate, and deduct only the portion of your home expenses that are related to your business use.
A home-based sole proprietorship is ideal for businesses that do not require a lot of space, equipment, or inventory, and that do not generate a lot of noise, traffic, or pollution.
Online Sole Proprietorship
An online sole proprietorship is a type of sole proprietorship that conducts most or all of its business activities online, such as selling products or services through a website, blog, social media, or e-commerce platform. An online sole proprietorship has many benefits, such as reaching a wider market, reducing operational costs, and increasing flexibility and scalability.
To run an online sole proprietorship, you need to create and maintain a professional and secure website that showcases your products or services and allows customers to place orders and make payments. You also need to comply with the laws and regulations of the jurisdictions where you operate and where your customers are located, such as sales tax, consumer protection, privacy, and intellectual property laws.
An online sole proprietorship is suitable for businesses that can offer digital or physical products or services that can be delivered online or shipped to customers.
Franchise Sole Proprietorship
A franchise sole proprietorship is a type of sole proprietorship that operates under the name and system of an established business, known as the franchisor. A franchise sole proprietorship allows you to benefit from the brand recognition, reputation, training, support, and marketing of the franchisor, while retaining some independence and control over your own business.
To run a franchise sole proprietorship, you need to sign a franchise agreement with the franchisor and pay an initial fee and ongoing royalties. You also need to follow the rules and standards set by the franchisor regarding the products or services you offer, the prices you charge, the suppliers you use, the location and appearance of your business, etc.
A franchise sole proprietorship is a good option for businesses that want to leverage the success and experience of an existing business model, but it may also involve high costs and restrictions.
As you can see, there are different types of sole proprietorship that offer different benefits and drawbacks for your business. You should consider factors such as your goals, preferences, risks, costs, and tax implications when choosing the best type of sole proprietorship for your situation. You should also consult with a lawyer or an accountant before making any legal or financial decisions.
Types of Sole Proprietorship and Their Global Demand
Sole proprietorship is a type of business entity that is owned and run by one person, without any legal distinction between the owner and the business. There are different types of sole proprietorship businesses, depending on the nature of the goods or services they provide, the size of the operation, and the level of involvement of the owner. Here are some examples of sole proprietorship businesses and their global demand trends.
Self-employed Business Owner
A self-employed business owner is someone who conducts a trade or business with the intent of making a profit. This can include professionals, consultants, freelancers, artisans, and online sellers. According to a report by MBO Partners, there were 41.1 million self-employed Americans in 2020, representing 26% of the total workforce. The report also projected that the number of self-employed workers will increase to 47.6 million by 2025, driven by the growth of the gig economy, the digital platforms, and the demand for flexible work arrangements.
Independent Contractor
An independent contractor is a self-employed sole proprietor who works for another entity as a non-employee. They are hired for specific projects or tasks and have control over how they perform their work. Independent contractors can be found in various industries, such as construction, transportation, education, health care, and technology. According to a study by Upwork, there were 59 million independent contractors in the U.S. in 2020, accounting for 36% of the workforce. The study also estimated that independent contractors contributed $1.2 trillion to the U.S. economy in 2020, an increase of 22% from 2019. The study attributed the rise of independent contracting to the COVID-19 pandemic, which accelerated the shift to remote work and increased the need for flexible talent solutions.
References:
https://www.ssm.com.my/sites/default/files/guidelines/OWNER%20RESPONSIBILITY_new.pdf
http://gst.customs.gov.my/en/SiteAssets/doc/Registering%20for%20GST%20Amend%201.pdf
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.nolo.com/legal-encyclopedia/sole-proprietorships
https://www.investopedia.com/terms/s/soleproprietorship.asp
https://www.legalzoom.com/articles/types-of-sole-proprietorships
