A sole proprietorship occurs when a single person decides to start a business. An S corporation may have up to 100 shareholders participating as owners of the business. S corporations provide small business owners with the benefits of an incorporated company without the tax disadvantages witnessed in a regular corporation. Despite the issue of limited liability, sole proprietorships offer business owners many advantages over an S corporation in terms of formation and control of the business.
Ease of Formation
Sole proprietorships are much easier to form than S corporations. A sole proprietorship starts automatically when a person makes a business transaction. On the contrary, an S corporation must file articles of incorporation, also known as a certificate of incorporation, to begin the legal existence of the business. In addition, S corporations must pay a fee to the secretary or department of state to file articles of incorporation. This means it costs less to form a sole proprietorship than an S corporation. Also, an S corporation must file paperwork with the Internal Revenue Service (IRS) to attain S corporation status. Sole proprietorships do not have to file paperwork with the IRS to begin the legal existence of the business.
Sole proprietors have control over every aspect of the business. In a sole proprietorship, there is no need to consult with other people, since there are no other owners. An S corporation with more than one owner has to consult with each owner before making a company decision. This can be difficult in the case of an S corporation with 50 owners that reside in different states. Sole proprietors may be able to react faster to changes in the business environment, since there is no need to consult with other individuals.
Lack of Formalities
A sole proprietorship does not have to adhere to the same formalities as an S corporation. An S corporation must have written bylaws to provide rules and regulations for operating the business. Sole proprietors do not need written bylaws. S corporations are required to hold at least one meeting on an annual basis. Sole proprietors are not required to hold company meetings. An S corporation must file annual reports with each state in which the company makes business transactions. Sole proprietors do not have to file annual reports with any state. Furthermore, S corporations must elect a board of directors to govern the company’s resources and implement strategy and policy. Sole proprietorships are not required to elect a board of directors.
Sole proprietors have complete control over the company’s business resources. This means a sole proprietor can allocate company resources in any manner he chooses. Though it is advisable to do so, a sole proprietor does not need to separate personal resources from business assets, meaning she can use personal funds to pay business obligations and business funds to pay personal debts. Owners of an S corporation cannot use business funds to meet personal obligations. Owners of an S corporation must separate business capital from their personal assets. Also, owners of an S corporation receive distributions from the business according to their ownership interest in the company.