What is a Sole Proprietorship?

A sole-proprietorship is a business that is owned by one person or by a husband and wife. Unless the business is formed as a corporation or a limited liability company, it will be a sole-proprietorship by default. One of the biggest advantages of operating a business as a sole-proprietorship is that it does not require that the business owner comply with statutory requirements regarding decision-making. This differs from a corporation where state statutes require shareholder's meetings, the election of a board of directors and officers, and directors' meetings. For many small business owners, the statutory requirements of operating a business as a corporation are just too cumbersome. After all, they are far too busy running the business to have meetings for the purpose of granting themselves the authority to run the business.

The biggest drawback to operating a business as a sole-proprietorship is the potential for personal liability. Most business owners expect to be responsible for the debts of their business and have probably given personal guarantees for any business loans. But if the business were to be sued for any reason and have a judgment entered against it, the business owner would be responsible for that as well. The amount of liability could exceed the entire value of the business and cause extreme financial hardship to the owner. For many business owners, avoiding the potential for this kind of liability is well worth complying with the requirements for operating as a corporation.

A sole-proprietorship is also unique in how it is treated for federal income tax purposes. All of the profits of the business are taxed as income to the owner. This may not be the form of business that would result in lowest amount of taxes being paid by the business owner.

Sole Proprietorship - Points to Consider

• Easiest type of business organization to establish. There are no formal requirements for starting a sole proprietorship
• Decision making is in direct hands of owner.
• All profits and losses of the business are reported directly to the owner's income tax return.
• The startup costs for a sole proprietorship are minimal.
• Owner has unlimited liability. Both the business and personal assets of the sole proprietor are subject to the claims of creditors.
• Because a sole proprietorship is not a separate legal entity, it usually terminates when the owner becomes disabled, retires, or dies. As a result, the sole proprietorship lacks continuity and does not have perpetual existence like other business organizations.
• It is difficult for a sole proprietorship to raise capital. Financial resources are generally limited to the owner's funds and any loans outsiders are willing to provide.
• Owner could spend unlimited amount of time responding to business needs.