A sole proprietorship is an unincorporated business that is owned by one individual with no legal distinction between the business and owner. In this form of business, the owner and the business are taken as one and the same person. It is also sometimes referred to as a "sole trader", "individual entrepreneurship", or "proprietorship." A sole proprietorship is the easiest form of business to set up and there are no registration formalities involved in forming one. However, just like all businesses, a sole proprietor still needs to secure licenses and permits prior to business operation. It is popular for many businesses such as consulting, freelancing, and so on because it is an easy form of business to maintain when the number of employees remains low. Considering how less complex of a business form it is, a sole proprietorship is often the first choice for many to begin their business ventures. A sole proprietorship can be formed by merely conducting business under the owner's given name or company name. The steps to forming one are as follows: Note that registration regulations may vary according to state, industry, and locality. The advantages of this form of business are as follows: It is usually easy to set up since there are no registration formalities involved. This form of business may be ideal for those who want to set up a small enterprise on their own quickly. Although registration policies vary according to factors like state or type of industry, the establishment of a sole proprietorship is generally less complicated compared to other business structures. Because this business structure isn't as complex as others, the owner may be able to save money that would have been used in putting up the business had it been a partnership, LLC, or corporation. The disadvantages of a sole proprietorship are as follows: Because there is no distinct separation between the owner and the entity, all personal and business risks shall be assumed by the sole owner. In the event of bankruptcy or any other unforeseen circumstances, creditors that may be owed by the business can sue the owner for payback even if it is not their personal property. The entire income earned from the business shall be taxed by the Internal Revenue Service (IRS) as the sole proprietor's personal income. Because the sole owner is in control of all business finances, raising capital for his/her business may be limited to personal finance or credit. A sole proprietorship is a popular form of business due to its simplicity and low cost. However, it is important for one to keep in mind that this type of business provides little protection against liabilities. It is often advisable to consider other forms of business when the number of employees grows much higher. Also, with the possible tax liabilities involved, the owner must have sufficient knowledge of taxation policies with regard to earnings from a sole proprietorship. Forming a Sole Proprietorship
Advantages of a Sole Proprietorship
Disadvantages of a Sole Proprietorship
Limitations on raising capital for the business.
Final Thoughts
Benefits of Sole Proprietorship FAQs
A sole proprietorship offers complete control and autonomy, flexibility in operations, the ability to keep profits, and the potential for tax advantages.
The main disadvantage is that owners are personally liable for any debts or legal action taken against the business.
Sole proprietorships typically have lower taxes than corporations due to their pass-through taxation structure and potential deductions such as home office expenses.
Setting up a sole proprietorship is relatively simple and requires only minimal paperwork.
Yes, depending on the type of business you are running, you may need to register your business with the government and obtain any required licenses or permits. Additionally, you may need to comply with certain laws, such as those relating to employee rights and safety.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
