In the United States, the entrepreneurial spirit is going strong. According to the Small Business Administration, 500,000 new small businesses were launched in 2019.
If you’re thinking of opening a business or starting a new side hustle, one of the biggest decisions you have to make is how to structure your business. The most common are sole proprietorships, partnerships, limited liability corporations (LLCs), and corporations.
If you’re not sure where to start and are trying to keep costs low, sole proprietorship advantages are numerous. After all, starting a business is all about how to make money. Here’s what you need to know about running a sole proprietorship.
What is a sole proprietorship?
A sole proprietorship is the default business structure. The IRS automatically considers you to be a sole proprietor if you conduct business transactions and don’t select another structure. This structure can be a smart choice if you want to keep things simple, or if you’re testing out a new idea and want to see how it performs before spending money on more expensive business structures and filing fees.
However, keep in mind that those are only the IRS’ requirements; there may be other things you need to do to run your business properly. For instance, you may need to apply for a business license for your state, county, or city, or you may need a permit to operate out of your own home. To find out what your local requirements are, contact the Small Business Administration in your area.
5 sole proprietorship advantages
If you’re thinking of managing your business as a sole proprietorship, there are five key benefits to running your business this way.
1. Easy startup process
As a sole proprietorship, you and your business are the same entity from a legal perspective. You have total control of your business, and there is nearly no paperwork to complete. That’s a big advantage over other business structures, like LLCs, that require you to file articles of organization.
You’ll only need to file paperwork if you plan on conducting business under another name. For example, if you’re advertising yourself as “Innovation Marketing” rather than using your first and last name, you’ll need to file “Doing Business As” paperwork with the state.
2. Low costs
If you want to open an LLC or S-Corp, you need to be prepared to pay fees. Depending on where you live, fees can be substantial. For example, it costs $500 in Massachusetts to register an LLC, and it costs $500 per year to submit your required annual report. By contrast, there’s no cost to operating a sole proprietorship.
3. No separate business taxes
With a sole proprietorship, you don’t need to worry about filing a separate business tax return. Sole proprietorships are pass-through entities, meaning your business profits pass through to your personal income. Your tax bracket is based on your personal and business income combined.
4. Qualify for business checking
Even though sole proprietorships don’t require any paperwork or fees, you still can operate like a real business. And part of this may involve simplifying your finances by separating the business from the personal. As a sole proprietor, you can open a business checking account. Some banks will require you to register for an IRS Employer Identification Number (EIN), but other banks will allow you to create an account with just your Social Security number.
Opening a business checking account is a smart idea, regardless of your business’ structure. It will simplify things for you at tax time, and protect you if the IRS selects you for an audit.
5. Gain eligibility for business credit cards
As a sole proprietor, you are also eligible for business credit cards. Typically, you can apply for one and get approved with just your Social Security number on the card application. Not only will it help you manage your expenses, but using a business card can help you earn valuable rewards.
Looking for the best business credit card? Consider these three options.
1. Ink Business Cash® Credit Card
If you’re just starting out and want a basic rewards card with a $0 annual fee, check out the Ink Business Cash® Credit Card card. You’ll earn:
- 5% cash back at office supply stores and internet, cable, or phone services (up to $25,000 combined annually)
- 2% cash back at gas stations and restaurants (up to $25,000 combined annually)
- 1% cash back on everything else
Plus, you’ll earn $750 bonus cash back after spending $6,000 in the first 3 months. And, you’ll get a 0% introductory APR on purchases for 12 months (then 17.74% - 23.74% (variable)), giving you time to finance major expenses.
2. Capital One Spark Cash Plus
If you’d rather earn a flat cashback rate rather than have different spending categories, consider the Capital One Spark Cash Plus. The annual fee is $150. You’ll earn 2% cash back on every purchase, every day; plus 5% cash back on hotels and rental cars booked through Capital One Travel.
As an added perk, you’ll earn up to $1,000 cash bonus — $500 after spending $5,000 in the first 3 months, plus $500 after spending $50,000 in the first 6 months.
3. American Express® Business Gold Card
If you want a premium rewards card, the American Express® Business Gold Card card may be for you. Although it has a $295 annual fee, its rewards and benefits can offset its cost. You’ll earn 4X Membership Rewards points for the first $150,000 spent in two select categories each year (after that 1X), and 1 point per $1 spent on other eligible purchases.
Earn 70,000 Membership Rewards points after spending $10,000 in the first 3 months as a new cardmember. The card has extra benefits like baggage insurance, car rental loss and damage waiver, and expenses management tools, though enrollment is required for select benefits.
|Card name||Reward details||Annual fee|
|Ink Business Cash® Credit Card||5% cash back at office supply stores and on internet, cable, or phone services (up to $25,000 combined annually); 5% cash back on Lyft; 2% cash back at gas stations and restaurants (up to $25,000 combined annually); and 1% cash back on everything else||$0|
|Capital One Spark Cash Plus||2% cash back on every purchase, every day; plus 5% cash back on hotels and rental cars booked through Capital One Travel||$150|
|American Express® Business Gold Card||4X Membership Rewards points for the first $150,000 spent in two select categories each year (after that 1X), and 1 point per $1 spent on other eligible purchases||$295 (terms apply)|
When a sole proprietorship might not be the right choice
While sole proprietorships are simple and cheap to operate, there are some drawbacks to keep in mind:
- Personal liability for debt: With a sole proprietorship, you are personally responsible for any debt you take on for the business. If you take out a business loan or use a credit card and fall behind on your payments, creditors can come after your personal assets to recoup their money — and wreck your credit in the process.
- Ownership limitations: As a sole proprietorship, you are the only owner. If you want to add a partner to share their expertise and take on responsibility, you’d have to dissolve the company and start a new business structure.
- Business ends if you leave: A sole proprietorship can’t be transferred to a new owner. If you decide to end the business or if you pass away, the business dissolves with you.
The bottom line on sole proprietorships
If you’re thinking of how to start a business, consider sole proprietorship advantages and drawbacks before making a decision on how to structure your business. While sole proprietorships are cheap and easy, they’re not for everyone. If you want to include partners, need to borrow money, or want to limit your liability, you may be better off with another business structure.
Up to 5% Cash Back
Earn $750 bonus cash back after spending $6,000 in the first 3 months
5% cash back at office supply stores and on internet, cable, or phone services (up to $25,000 combined annually); 5% cash back on Lyft; 2% cash back at gas stations and restaurants (up to $25,000 combined annually); and 1% cash back on everything else
- Earn $750 bonus cash back after spending $6,000 in the first 3 months
- $0 annual fee
- 0% intro APR on purchases for 12 months (then 17.74% - 23.74% (variable))
- Up to 5% cash back
- Capped spending on bonus cash back categories
- Has foreign transaction fee
- Earn $750 bonus cash back after spending $6,000 in the first 3 months
- 5% cash back at office supply stores and on internet, cable, or phone services (up to $25,000 combined annually); 5% cash back on Lyft; 2% cash back at gas stations and restaurants (up to $25,000 combined annually); and 1% cash back on everything else
- Intro purchase 0% APR offer: 0% for 12 months then 17.74% - 23.74% (variable)