A sole proprietorship is a business that has only one owner. It is also called a single-owner sole proprietorship or simply, one-person company. A sole proprietor does not have to register the company with any government agency and can start doing business immediately after obtaining the necessary permits and licenses. Sole proprietorships are recognized by the Internal Revenue Service (IRS) as small businesses operated by individuals who are self-employed, meaning they earn income from their labor at least partly in running their own ventures.
A person can be both an employee of another organization while being the owner of a sole propriety firm at the same time. The individual will need to pay taxes on earnings from both sources, which makes it important for them to keep good records of all transactions.
Here are factors to consider if you want to start a sole proprietorship:
1. Capital Requirement
Many sole proprietorships do not need a significant amount of capital to start, although it is better to have some money saved up. If possible, try to save enough for your initial expenses plus six months’ worth of operating costs. This enables you to avoid borrowing during the early stages, which could put a strain on the business and yourself.
The type of business determines how much capitalization you need. For example, if you intend to sell goods or services requiring equipment such as machinery and tools, you will need more money than someone who wants to work from home using only office equipment. If you need a web design agency to design a website for your business, you will need to have enough capital to pay the web design company. You can get ideas about how much capital you should have by researching similar businesses in your area.
Some businesses require a specific location to operate successfully. For example, if you plan to open a restaurant, your business will not flourish without an area where customers can be comfortably seated during meal times.
The location of your business also plays a role in determining the amount of capital you need. For instance, some companies that require heavy equipment or large amounts of space need more money than ones that do not have these requirements.
3. Licenses and Permits
Permits and licenses are required by law for any type of business operation, which is why it is crucial to obtain them before you start operating commercially. Depending on the industry you intend to participate in, federal or local government agencies may require different forms of permits. The city hall in your area is the best place to start when you want to get the necessary documentation.
Before opening up, it is wise to acquire insurance for both property damage and personal harm that might befall your customers or their belongings. You also need homeowner’s insurance if you plan on using a home office space.
5. Business Plans
Sole propriety businesses are operated informally, so there is no need for business plans unless you think they will better help run the business. Try to draw one up since it makes planning much easier, especially during hard times when money may be tight. However, even if you do not have one yet, it is still possible to open a sole proprietorship.
When you need help running the business, hiring employees with special skills is crucial. For example, web design agencies typically hire web designers and web developers or webmasters since they are necessary for operations. Give your new hires simple instructions that outline their responsibilities and make them sign an agreement to keep everything confidential.
Sole proprietors pay taxes based on how much they earn in profits each year rather than what they spend on operations as other businesses do. You can take advantage of deductions by keeping records of any expenses incurred during the course of doing business, including depreciation, repairs, supplies, web hosting, etc.
The IRS allows sole proprietors to claim $18,000 as a standard deduction each year. This means that you can deduct this much from your yearly income before filing for taxes. It is also possible to claim a home office deduction if you use a portion of your home as an office space.
8. Contracts and Agreements
Sole propriety businesses require a contract to determine the responsibilities of both parties. For web design agencies, this means that web designers get paid when they develop web pages, while web admins get paid when they manage websites. These contracts should be specific enough to avoid misunderstandings in the future. It is also advisable to have separate contracts for web design agency employees and web hosting services so that you do not get charged more than necessary by your web hosting company.
Starting a sole proprietorship requires you to have the right mindset and determination. It is risky but can be rewarding if you are committed to making it work. It is best to plan and prepare before you start doing business since it can help you save money and avoid problems later on.