Sole Proprietorships: Choosing the Right Business Structure

This blog is part 1 of a series exploring various business structures and what makes each structure unique. Specifically, it will examine the characteristics of sole proprietorships. Partnerships, corporations, limited liability companies, and joint ventures will be covered in separate blogs throughout the following month.

As an owner, you may have wondered at some point if the business structure currently in place was the right choice. Those looking to start a business have probably wondered about which structure would best fit their needs as well. Determining the right structure for your circumstances can lead to better performance and higher returns down the line. For example, shifting to a more complex framework than your business’s current structure could allow you to take advantage of certain legal protections or tax options. It could also help generate a higher collection agency valuation, depending on the state of your business’ operations. Ultimately, the decision depends on the type of business you are running, its size, and your goals for the business.

Sole Proprietorship

Sole proprietorship is the most common form of business organization. It is any unincorporated business owned entirely by one individual, which makes it easy to form and offers the owner total control. As such, many small business owners prefer this structure for its relatively straightforward nature.

One area in which sole proprietorship offers simplicity is taxation due to their status as a pass-through entity. Here, the owner’s net business income or loss is combined with their other income and deductions and taxed at individual rates on their personal tax return.[1] This offers various advantages, such as allowing an owner to deduct health insurance costs for themselves, their spouses, and their dependents.[2] In addition, business losses one suffers could offset any alternate income they generate. That said, sole proprietors do not have taxes withheld from their business income, so they will generally need to make quarterly estimated tax payments if they expect to make a profit.

Of course, sole proprietorship carries some risk as well. Unlike other business structures, the sole proprietorship is not legally separate from its owner. As a result, the owner is, in general, personally liable for all financial obligations and debts of the business. If a sole proprietorship loses its major revenue generators and goes out of business, for example, its creditors may pursue legal action against the owner to recover unpaid debts.

Certain business structures may be more appealing than others in various situations. Making the determination of whether your business’s current structure best fits your circumstances and goals is an important element of strategic planning. However, this can be a complex, multifaceted process.

Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their mergers and acquisition (M&A) strategies for thirty years. Whether you’re seeking professional sell-side representation, assistance forming a partnership or joint venture, a transaction assessment, or a collection agency valuation, Kaulkin Ginsberg will guide you through the process. For more information, or to schedule a confidential discussion of your business goals, contact us here or at at hq@kaulkin.com.

Works Cited

[1] “Sole Proprietorships.” Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships.

[2] “Tax Tips for Sole Proprietors.” TurboTax, Intuit, https://turbotax.intuit.com/tax-tips/small-business-taxes/tax-tips-for-sole-proprietors/L0aHf6OFc.