Sole Proprietor

A sole proprietorship is an unincorporated business owned by one person or married couple. The legal name for a sole proprietorship is usually the owner’s name. In a sole proprietorship, the owner makes all important decisions and is generally responsible for all day-to-day activities. The owner retains income earned by the business and profits are taxed as personal income.

Anyone can start a sole proprietor without legal formalities or process. A primary advantage of a sole proprietor structure is that it is easy to create. There are limited initial costs so a business can be launched and begin operating quickly. Another advantage to sole proprietorship is autonomy and flexibility. The owner can decide how to operate the business including hours of operation, inventory control, pricing, hiring of employees, and business strategy.

However, operating as a sole proprietor has some disadvantages. The responsibility for making the business a success rests with the sole proprietor who may not possess all the different skills and knowledge that may be needed.

Raising working capital can be a problem and sole proprietors often must rely on personal resources for financing. Money borrowed by and for the business is in the form of a personal loan and it is the sole proprietor who is responsible for payment. A sole proprietor bears unlimited liability for any losses incurred by the business. The principle of unlimited personal liability means that if the business incurs a debt or suffers a catastrophe (say, getting sued for causing an injury to someone), the owner is personally liable. Sole proprietors put personal assets (bank accounts and other forms of collateral) at risk for the sake of the business. Risk can be mitigated with insurance, but liability exposure can still be substantial.

A related concern is that since sole proprietors are the business, any profit that is generated is taxed as income which is typically higher than dividend income which a business owner would receive under a corporation structure.

Sole proprietorship is a common way to start a new business as legal formalities are not required to begin an enterprise. At the same time, the absence of a liability shield means that the proprietor will be personally responsible for the liability of the business and the tax implications might suggest a different structure depending on the business needs.