Starting-up in Business:Why Start a Sole Trader/ Proprietorship Small Business in the U.S.?.

What is a sole Proprietor or soletrader these thoughts escape most people until they decide to break away from their known norm and then it's time to learn. When someone decides to form a business it is usually because of a desire to make money independently from a bright idea. But before the business can start the business owner must decide how the business is going to be structured, organised and operated. These key decisions will have an impact on the start-up costs, business tax affairs, accounting and legal liabilities. Each type of business formation is an entity that has a different set of legal documents that depends on the type of business being undertaken.

There are six basic business types to consider which comprise:

Sole Proprietorship

Partnership

Limited Liability Company (LLC)

Starting-up an S or CCorporation

Starting with the simplest business form has a few advantages: allows the owner to have total day-to-day control over every aspect of trading and it makes the bBusiness model much more flexible and responsive to change as the market dictates during the early formative stages of development.

If the business grows then cash flow, insurance and taxation burdens will increase and may signal a re-examination of the fundamental business structure.

The choice of the legal business entity depends on a multitude of factors that can have a great impact on the success of the business;it is a key decision that needs careful consideration. The structure chosen will affect: financing from banks, method of tax payments, method of accounting, personal risks in the venture and the level of control the “owner”or director has over the business.

For people new to the business world it is often best to keep things simple and to keep the start-up costs to a minimum by starting a Sole Proprietorship and see how the business develops; the type of business entity can be changed as the nature of its organization develops. It is worth noting that a business which fails can be costly to close it down especially if it's a corporation or LLC.

The most common and prevalent form of business organisation in the U.S.  is the Sole Proprietorship or Sole Trader and that is because it is the easiest to start and it is the least regulated; keeping running costs to a minimum. This is the traditional one person business where all profits and losses belong to the owner and only exists because of the owner. All liabilities and successes are personal to the owner whose business ends either through the sale of the enterprise or death of the owner. The U.S. Sole Trader has100% control and authority on all aspects of the enterprise.

A key issue about being a sole proprietor is that all the personal and business assets and liabilities of the enterprise belong to the owner and are therefore at risk if the business runs into problems with creditors. For example if the debts of the business exceed its assets then the creditors can target the personal assets of the owner, namely the family home. This unlimited liability feature of being self employed as a sole proprietor is the main weakness of this business model. But it is possible to insure against claims that might compromise personal wealth; an all risks insurance package is expensive especially for a fledgeling business that does not have a track record. It is therefore very important and a legal requirement to have Private and Public Liability Insurance for protection against accidents and associated compensation claims.

Many small businesses are often under-funded at the out-set and it is for this reason that a professionally prepared cash flow forecast is a valuable tool for controlling over-heads and stock. It may also be used to help secure a bank loan using either the collateral of the business or personal assets. But if personal assets are used to finance the business then they are at risk of liquidation if the enterprise fails. It is therefore quite difficult to start a business that does not have its own collateral without risking personal wealth.

Another weakness of a sole trader business model is that most self employed people fail to delegate responsibility and expertise to employees and that makes it very difficult to sell and continue the business without the owner/ founder. This makes a proposition for a bank loan too difficult because it will be viewed as being high risk.

For many the biggest advantage is the total freedom to organise and operate the business without external influences, constrained only by the economics and effort needed to realise success. This is why this model is so popular and a key reason that weighs in favour of starting a sole proprietorship even with its high risk disadvantages.

The structure of the organisation can take the simplest form and the only legal restrictions on how the business is operated are book-keeping records for tax purposes; this is the least regulated enterprise model. The sole owner is responsible for all decision making.

From a legal stand-point there are only four things that are mandatory for a small start-up company: obtaining a local business license, file an affidavit;if the business name differs from the owners name, publish a notice in a local newspaper about the business name. This tells creditors the real identity of the sole trader who becomes personally liable for the obligations and debts of the company. The final legal obligation is to register with various tax authorities for identification numbers at local, state and federal levels. Therefore it can be realised that starting-up a small business as a sole proprietor is simple and low cost.

The methods of calculating taxation for partnerships and corporations makes the sole proprietorship fledgling business very attractive because the profits and losses are personal to the owner. Which means the profits are taxed only once at the marginal rate and the losses can be used to offset taxation against other streams of income.

The key to success is careful planning and control of finances and liabilities.