What is a Sole Proprietorship?
A sole proprietorship is a common way that many new small businesses start out.
The business consists of one owner—the sole proprietor. In many cases, the
sole proprietor is in charge of most areas of business: marketing, sales, accounting,
and so on.
In a sole proprietorship, all the assets and profits of the business are, technically,
owned by the sole proprietor; the sole proprietor is also responsible for all the
debts and liabilities of the business. This is because legally, the sole proprietor
and the business are the same. (Compare this with a corporation or LLC, in which
the owners are legally separate from the business.)
Advantages of a Sole Proprietorship
A sole proprietorship is an attractive option for many small businesses that require
a simple, relatively low-cost startup.
Setting up a sole proprietorship is consistantly cheaper than setting up a corporation
Sole proprietors receive all income generated by the business to keep or reinvest.
Profits from the business flow directly to the sole proprietor's personal tax return.
It's very simple to dissolve a sole proprietorship.
Disadvantages of a Sole Proprietorship
While sole proprietorships are set up with relative ease, there are characteristics
of this structure that make it a less than ideal choice for certain types of businesses.
Sole proprietors are not personally protected from any debts and liabilities of
the business; for this reason, a sole proprietorship may not be the best choice
for a business with significant funds tied up in leasing costs or inventory.
Sole proprietorships have a hard time raising money from investors, as there is
no structure to invest in.
There's no continuity when it comes to sole proprietorships. Because the business
is the owner, if the owner dies or leaves the business, there's no business
left to be passed to another owner.
Sole proprietorships are valid for a specific period of time, typically 5 or 10
years. Renewals can certainly be filed—but if the owner forgets to do so,
his or her business simply ends.
If you'd like, you can learn more about the differences between specific entity
types on our DBA vs. Incorporation
or LLC, S Corp, and C Corp
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