Article updated Sept. 3, 2017
The most common and simplest form of business is a sole proprietorship. Many small businesses operating in the United States are sole proprietorships. An individual proprietor owns and manages the business and is responsible for all business transactions. The owner is also personally responsible for all debts and liabilities incurred by the business. A sole proprietor can own the business for any duration of time and sell it when he or she sees fit. As owner, a sole proprietor can even pass a business down to his or her heirs.
In this type of business, there are no specific business taxes paid by the company. The owner pays taxes on income from the business as part of his or her personal income tax payments.
Sole proprietors need to comply with licensing requirements in the states in which they’re doing business as well as with local regulations and zoning ordinances. The paperwork and formalities, however, are substantially less than those of corporations, allowing sole proprietors to open a business quickly and with relative ease—from a bureaucratic standpoint. It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors.
Advantages of a Sole Proprietorship
- A sole proprietor has complete control and decision-making power over the business
- Sale or transfer can take place at the discretion of the sole proprietor
- No corporate tax payments
- Minimal legal costs to forming a sole proprietorship
- Few formal business requirements
Disadvantages of a Sole Proprietorship
- The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company. For that reason, it is usually more advisable to start a business as a corporation or LLC rather than as a sole proprietorship.
- All responsibilities and business decisions fall on the shoulders of the sole proprietor.
- Investors won’t usually invest in sole proprietorships.
Note: If the business is conducted under a fictitious name, it’s up to the sole proprietor to file all applicable forms under the fictitious name or under “doing business as” (DBA). This, however, does not mean that the business is a separate entity from a legal standpoint. The sole proprietor remains liable even if he or she is doing business under a fictitious name.
Most sole proprietors rely on loans and personal assets to initially finance their business. Some will elect to incorporate or become an LLC once the business has started to grow, while other business owners maintain their sole proprietorship for many years.