What is a Sole Proprietorship?
A sole proprietorship is a person who owns an unincorporated business by himself or herself. In a sole proprietorship, there is no legal distinction between the owner and the business entity.
A sole proprietorship is considered a single entity for tax and liability purposes, and the owner does not pay income tax separately for the company. However, sole proprietors, like other business owners, have specific tax responsibilities regarding payment of self-employment taxes, estimated taxes, social security and Medicare taxes, unemployment taxes, and other taxes.
Sole Proprietorship Examples
Let's say you open a restaurant. If you are the only owner of the business and the business is not incorporated, then your company is probably a sole proprietorship. Other examples include small businesses, such as a single person art studio, a local jewelry store, or a pet management service. As soon as a person begins offering goods and services to others, they are essentially forming a sole proprietorship.
Keep in mind the status of the company itself is important; if you take on a partner, incorporate, or form a Limited Liability Company (LLC), you are not considered a sole proprietorship.
Sole Proprietorship Advantages and Disadvantages
Sole Proprietorship Advantages
Because there is only one party involved, one advantage of a sole proprietorship is that it is relatively uncomplicated to register the business. The owner is required to register with the appropriate local authorities, who will ensure that the name submitted is not duplicated by another business entity. In many US states, this authority is the Secretary of State.
Another important sole proprietorship advantage is that the owner keeps all the business profits. Other benefits involve a more simplified tax reporting structure and a less expensive and more efficient operating framework.
Sole Proprietorship Disadvantages
In business law, sole proprietorships have unlimited liability, meaning that the owner is personally responsible for the debts and obligations of the business, and lenders may look to the owner's personal assets for payment of these obligations.
This is in direct contrast to a limited liability company (LLC), a business entity that protects its shareholders from liability beyond their investment. LLCs allow lenders and courts to only seize the assets of the business rather than the assets of the owners. Thus, some business owners may find it more advantageous from a liability standpoint to incorporate or form an LLC.