What You Need to Know About a Sole Proprietorship

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A sole proprietorship is one of the three common ways that businesses are structured (the others being partnerships and corporations.) A sole proprietorship is distinguished by being owned and run by one person; there is no legal separation between the owner and the business.

Just like any form of business, a sole proprietorship has advantages and disadvantages. Those interested in sole proprietorship should conduct a careful analysis of the needs, risks, and ambitions of the venture to make a proper determination as to which type of business entity is best.

Key Takeaways

  • In a sole proprietorship, the business is owned by one person and there is no legal separation between the owner and the business
  • Despite lack of business-owner separation, sole proprietorships can have a name different from the owner
  • Lack of separation between owner and business also increases personal liability of the owner. For example, business taxes are reported on owner's personal return
  • Sole proprietorship business structure offers more control to the business owner compared to other forms of business ownership


What Is a Sole Proprietorship?

A sole proprietorship is a business entity with a single owner. That implies that the owner bears direct responsibility for all elements of the business and is fully accountable for all finances, including debts, loans, and losses. The business is also taxed as an extension of the owner.

Personal Liability

Since there is no separation between the owner and the business, the owner of a sole proprietorship holds unlimited liability for the business, including full responsibility for all of the debts and/or losses that result from business operations. In turn, the owner is entitled to all of the profits generated by doing business.

Setting Up a Sole Proprietorship is Easy

Registration of a sole proprietorship is simple. The process involves the selection of a business name, and filing a "doing business as" (DBA) with the local tax authorities. A sole proprietorship is not considered a "legal entity" since there is no distinction between the business and the owner. The business and the owner are considered to be one and the same.

Hiring Employees

As a sole proprietor, the owner can hire employees and independent contractors, and may ask the hired help to make decisions that affect the way the business is run.

The IRS allows the spouse of a sole proprietor to work in the business without being considered a partner. This stipulation makes it possible to retain an additional worker and still be considered a sole proprietorship status.

Control

Another key benefit of a sole proprietorship is that when forming the business (and throughout the life of the organization) the owner has total rights to the conduct of the brand. This means that the owner does not have to concern themselves with the intent of partners, a board of directors, or virtually anyone else who might have an interest in the enterprise. The operations and maintenance of the business is entirely the result of the business owner's right.

Financing a Sole Proprietorship

The owner of a sole proprietorship has a number of options available when it comes to obtaining business financing. This includes loans from the U.S. Small Business Administration (SBA), which has an inherent interest in helping small businesses succeed.

Loans under the SBA financing assistance program are not originated by the SBA, but the administration does guarantee loans to small businesses from independent lending institutions.

The SBA is also able to facilitate alternative means of financing, such as government grants and stipends. In these cases, however, it's important that sole proprietors understand that certain criterion must be met such as business size, income standards, employee diversity, among other variables. Local government bodies and economic development agencies also give grants based on a business's ability to stimulate the local economy in which it exists.

Frequently Asked Questions (FAQs)

How do you start a sole proprietorship?

If you're ready to start a business by yourself and have decided on structuring it as a sole proprietorship, you need to take a few easy steps to get it all set up. The first thing to do is to ensure you have all your documents to register your business, such as your Employer Identification Number (or your SSN if you have no employees). Then come up with the name for the business you want to register. Finally, register your business with your county or local tax authorities.

What is the difference between a sole proprietorship and an LLC?

A sole proprietorship is a business entity owned by a single person and has no separation of between the business and the owner. So while the owner all the profits, the personal liability of taxes, losses and debts also rest with them. LLCs are a business structure that allow for benefits of both sole proprietorships and partnerships. LLCs, like a partnership, can have multiple owners. Also, in most circumstances, an LLC protects the owners from personal liability and limits the risks to their personal assets.

Article Sources

  1. Cornell Law School Legal Information Institute. "Sole Proprietorship."

  2. Internal Revenue Service. "Sole Proprietorships."

  3. New Jersey Division of Taxation. "New Jersey Tax Guide - Starting a Business in New Jersey," Page 2.

  4. Cornell Law School Legal Information Institute. "Doing Business As (DBA)."

  5. Internal Revenue Service. "Topic No. 407 Business Income."

  6. Internal Revenue Service. "Can a married couple operate a business as a sole proprietorship or do they need to be a partnership?"

  7. M&T Bank. "Small Business Loans."

  8. Small Business Administration. "Choose a business structure."