What is a Sole Proprietorship?

Here in the US, the most commonly found types of businesses are the corporation, the LLC (Limited Liability Company), general partnership and the sole proprietorship.  Each one of these business structures has its own advantages as well as its disadvantages.  These can be in terms of how complex the business is, how easy it is to set up, the cost, the liability protection, the requirements of periodic reporting, the complexity of operation and taxes.  Additionally, some of these forms of business structures have sub-classes.  Choosing the right structure for your business requires that you have more than a working knowledge of these structures and what they entail.  With that in mind, let’s talk about the sole proprietorship.

9045254666_9c7aa82fc5_oSole Proprietorship

This is a business structure that is relatively simple.  In this case, the business is not considered to be a legal entity.  Sole proprietorship actually refers to a single person who is the owner of the business and who is held personally responsible for any debt that is incurred by the business.  This type of business can be operated under the owner’s name or with a fictitious name.  A fictitious name is just a trade name, it doesn’t create any type of legal entity that is separate from the owner of the business.

This is a popular type of structure for a small business simply because of the simplicity of it.  It is easy to set up and doesn’t cost that much.  A sole proprietor only needs to register the name and get the local licenses that are necessary to be ready to begin business operations.  One distinct disadvantage though is that the person who owns a sole proprietorship is held personally liable for any debt incurred by the business.  This means that if the business begins to have trouble financially, lawsuits can be filed by creditors against the owner.

Owners of sole proprietorships typically sign contracts using their own name because the business is not legally a separate entity.  Customers will generally make their checks out to the owner and this is true even when the business uses a name that is fictitious.  An owner of a sole proprietorship can – when necessary – bring lawsuits in the name of the owner.  Many businesses get their start as a sole proprietorship and then move on to more complex business structures as the business grows.

Advantages

  • Sole proprietorships can be established quickly, easily and cost effectively
  • There are little, if any, formalities involved with this type of business structure
  • Sole proprietorship owners do not need to pay for unemployment taxes on himself.

However, if there are other employees, unemployment tax must be paid for them

Disadvantages

  • Owners of this type of business structure subject themselves to  personal liability for debts, liabilities and losses of the business
  • Capital for the business cannot be raised by the sale of stock in said business
  • Because of the fact that this type of business rarely survives the incapacity or death of the owner, it does not retain any value

Hopefully, this has answered some of the questions that you may have had regarding the sole proprietorship business structure.  Click here to contact us now for more information.

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