The Sole Proprietorship
A sole proprietorship, also known as a sole trader or simply a proprietorship, is the simplest and most common structure chosen to start a business. The sole proprietorship is not a legal entity, it just refers to a person who owns the business and is personally responsible for its debts. In other words, there is no legal distinction between the owner and the business. It can run under the owners name or a “Doing Business As” name, commonly known as a trade name. Sole proprietor owners can, and often do, commingle personal and business property and funds, something that partnerships, LLCs and corporations cannot do.
Forming a sole proprietorship
The sole proprietorship is a popular business structure because it’s simple, easy to set up, and doesn’t cost much up front. There is no formal action you have to take to form it. As long as you are the only owner, the status automatically comes from your business activities. You might already be one without knowing it. For example, freelance writers are sole proprietors. To make things official, just obtain all of the necessary licenses, permits, and get all of the paperwork squared away. Laws and regulations vary by state and industry.
This is the biggest potential downfall of a sole proprietorship, the lack of protection from personal liability. Other business structures, such as corporations and LLC’s, provide more protection of your personal assets in the event of litigation or if funding goes south, creditors can only reach the assets of the business entity. Operating as a sole proprietorship may put your personal assets at risk.
This is another potential downfall of a sole proprietorship. Any income that comes into the business is treated as income to the business owner, meaning, all income is reported on your personal tax return, and is taxed in the year it is received. You report income and expenses with a Schedule C and the standard form 1040. You are also responsible for paying all income taxes, including self-employment and estimated taxes. Learn more about sole proprietorship taxation and forms
Pros & Cons of a Sole Proprietorship
- Easy and inexpensive to form.
- You have 100% control.
- Easy tax preparation.
- Owner receives all profit of the business
- Owner is subject to unlimited personal responsibility for debts, losses, and liabilities of the business.
- Owners can’t raise capital by selling an interest in the business.
- Has limited resources.