Sole Proprietorship

A Sole Proprietorship (also referred to as sole trader or proprietorship) is the most common and simplest business type under which one can operate a business in that it legally has no separate existence from its owner. It is owned by one individual (the sole proprietor) who is entitled to all of the profits of the business, which are taxed at the sole proprietor’s individual income tax rate. However, the sole proprietor can be held personally liable for any business-related obligations, meaning that creditors can legally come after your personal assets, such as your house or other possessions.

Example

Terry opens a seafood restaurant called Terry’s Surf & Turf. Since Terry is the only owner of the restaurant and it is not incorporated, then her business is most likely a sole proprietorship. However, if Terry wants to expand by either taking on a partner, incorporate, or form an LLC, then Terry’s Surf & Turf is not considered a sole proprietorship anymore.

Advantages

  • Very simple and inexpensive to get started as the paperwork required is minimal.
  • The sole proprietor of a sole proprietorship has full authority to make important business decisions on behalf of the company at his sole discretion.
  • Sole proprietorship tax rates are among the lowest of any business form (according to the Small Business Administration).
  • Since the income earned with a sole proprietorship business is considered the owner’s personal income, its income tax return is filed on Schedule C of the sole proprietor’s personal income tax return, making the filing relatively simple.

Disadvantages

  • No legal separation between business and personal liability: You are not able to shield your personal assets from liability for the debts of the business. You also cannot file bankruptcy for your business without filing personal bankruptcy.
  • A sole proprietor cannot sell a share of his business to an investor, making it difficult to raise money to expand.
  • Potential clients or partnership might assume that a a sole proprietorship is not as legitimate and trustworthy than a corporation or an LLC.

[mashshare]