Small Business

Types of Sole Proprietorship to Make Smart Business Choices

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By Next Insurance Staff
Jun 13, 2020 min read

You’ve likely opened your own business because of the expertise gained in your specific industry. 

Your role with a former employer may have been in sales, marketing, operations or finance and now you’ll have to gain deeper insight into all four of these areas. Naturally, you could always focus on what you do best, and delegate the rest. But asking other folks to contribute would presuppose you have employees, and that may or may not be the case. 

Welcome to the hustle and bustle of business ownership— where new decisions have to be made every day and no two days are ever the same. Before you even get off the ground, however, you’ll need to decide which ownership structure best fits your business model. If you have partners, investors or both, you may need to seek accounting and legal advice before filing your business registration. 

Different Business Ownership Structures

Before you receive your first payment for products or services, you’ll need to nail down ownership structure. Let’s take at various forms of business ownership you might consider, depending on your circumstances: 

Corporation 

If you have multiple owners or stakeholders in the mix, you’ll also have a number of people with personal assets to protect. This business entity is established when these owners are transformed into shareholders through articles of incorporation. The percentage of ownership may equate to the percentage of shares received by each individual with a vested interest in the business. The main advantages of corporations are that they are treated as an individual entity and any personal holdings of owners cannot be attached if the business fails to meet debt payments or other obligations. 

Limited Liability Company

Similar to a corporation, personal assets of owners are shielded from liability but an LLC is not treated as a sole entity. Profits or losses are passed on proportionately to owners who file these amounts on their own tax returns. 

Partnership

In a general partnership, all partners share in profits and liabilities. Limited partnerships are formed to protect the personal assets of one partner from potential liabilities or financial judgments incurred by another owner. Profits and losses are otherwise shared proportionately. 

Sole Proprietorship

When starting a sole proprietorship, it’s all you. You’re directly responsible for all decisions, profits, losses and liabilities resulting from the operation of the business. You typically report revenues and expenses on IRS Form 1040 Schedule C, which either adds profits to or deducts losses from your other reported taxable income. This is the most common form of business ownership in the United States with about 73% of all small businesses registered in this manner.     

starting a sole proprietorship

Different Categories of Sole Proprietorships 

While legal and tax requirements have no differences among them, there are a few different subcategories of business that informally fall under the umbrella of a sole proprietorship business. 

Here are three types of sole proprietorships to examine when starting a new business, and we examine the characteristics of each:

Self-employed and Freelancers

These individuals may come from any type of background or pursue any kind of work and the vast majority of these are one-person operations. You might find consultants, writers or graphic artists who fall under the freelance tab and likely work from home without a ton of capital tied up in the business. In many cases, freelancers ply their trades on the side and may have full-time day jobs.

Comparing freelance versus self-employed folks, it may be splitting hairs but the latter group could be seen as depending entirely on revenue from sole proprietorships as their primary source of income, and the pursuit is a full-time endeavor. This might include a small retail business that employs family members or perhaps a non-related part-time worker. 

Independent Contractors and Subcontractors 

Under this category fall a number of potential operations but you might think of the construction trades when you hear these terms. Plumbers, carpenters, and electricians would fit the mold of an independent contractor when they’re securing jobs on their own. 

By contrast, when an independent contractor is hired by a general contractor (GC) overseeing operations on a multifaceted commercial project, for example, independent contractors can also double as subcontractors, receiving payments from the GC that are reported on an IRS 1099 Form. 

sole proprietorship business

Franchises

The tax reporting and ownership structure may be the same, but a franchise must often conform to a prescribed way of doing business. That method is reflected in operating and marketing strategies laid out by the franchisor or organization that holds licensing rights to or trademarks on names, products, logos, etc. So, while a franchisee may have some autonomy with management style, there’s little to no control over brand appearance, quality and consistency. 

Legal and Administrative Considerations 

In setting up a sole proprietorship, you won’t find any differentiation in the way taxes are filed and paid. 

All income and expenses flow to a personal reporting form. The same holds true when you register sole proprietorship with federal, state or local government authorities. Unless you apply for an employer identification number (it’s not mandatory), you can simply use your Social Security number when filing taxes or applying for business financing. 

You’ll encounter variation when it comes to licensing and certifications. A self-employed financial consultant may obtain a license to sell insurance and securities but a stylist who maintains their own salon will pursue a state certification in cosmetology, for example. 

These differences will also define the type of risk setting up a sole proprietorship and the business insurance plans you’ll need in place to protect your assets. A freelance skydiving instructor will have very unique insurance needs as opposed to a self-employed personal trainer. That’s somewhat of an extreme comparison but you get the gist. Should the risk the great or small, you’ll need to gauge sole proprietorship liability.

Let Experience Be Your Guide to Business Ownership 

If you’re opening your own shop, the variety of experiences you’ll have will provide invaluable educational opportunities within the school of the real world. 

However, you won’t need to be an expert on everything to reap the benefits of sole proprietorship. When it involves your insurance planning, Next Insurance has all the tools and expert advice you need to learn the basics and lean on us for the finer points. 

Contact Next Insurance today for a comprehensive business insurance consultation.

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By Next Insurance Staff
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