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The Right Business Structure? Starting a Sole Proprietorship
Starting a business requires you to complete a number of steps and make some key decisions. Though part of your overall plan, you?ll need to decide on a business structure, and obtain the necessary licenses and permits. In addition, determining which financing options will meet your short-term needs and long-term goals is crucial.
When you are starting a new business, one of the first decisions you must make is what kind of business you wish to start. The kind of business you choose depends largely on your personal assets, and when you make this decision it effects how your business will be viewed by the IRS and by investors. A popular option for first-time business owners is a sole proprietorship. There are both advantages and disadvantages to this type of business, so research all the different kinds before choosing the one that is best for you and your business situation.
Most businesses start as a sole proprietorship. This kind of company is owned only by you and run only by you, so you are responsible for all of the actions of the company. To the public, you are the company. Sole proprietorships work well for CPAs, freelance artists, craftsmen, and medical professionals who see no need in the future to expand their business to include more employees or to sell stocks to investors. Many sole proprietorship businesses are run from the home.
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In starting a small business you should never think you can do it alone! One of the best ways to insulate yourself against business failure is to find and work with a mentor, someone with business experience who can guide and assist you.
A good resource is the Service Corps Of Retired Executives (SCORE) which can link you to retired professionals who are available to give you advice.
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The advantages to starting a sole proprietorship are great. First, there is less start-up cost, and it is very possible that you will not need a business loan from a financial institution to begin. In many cases you are taking a hobby and selling the service or resulting product. In this case, you probably have everything you need already to get started and simply need to find advertising for your new business. Secondly, you are 100% your own boss. You get to make all of the business decisions and you take home all of the business's profits at the end of the day. Because of this, it is easy to reinvest that money back into the company to help it grow. Taxes become simple for a sole proprietorship business, since they are easily done on the owner's personal tax return, and, if the business unfortunately fails or you lose interest, it can be easily dissolved without affecting other employees or investors.
However, sole proprietorships have a number of disadvantages as well. Because you are using your own money to start the business, you will lose it all if your business fails. You will be legally responsible for the actions of your business, and if you take out loans, you must pay them back regardless of how the business succeeds or fails. Loans, however, may be difficult to get in the first place since you have only your personal assets on which to rely. Lastly, it is possible to have employees or to outsource some of your business, but until your company has been in operation for a few years and has proven itself stable, you may have trouble attracting other workers, who see the business as a risk. Employee benefits for yourself and others are also more expensive in this case.
Before you choose the type of business you want to start, remember that you ultimately need the best kind for your company. Look at the disadvantages and advantages of sole proprietorships to find out if it is right for you.
About the Author: Michael Saunders has an MBA from the Stanford Graduate School of Business. He edits a site on Starting a Small Business and is president of Information Organizers, LLC.
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