Sole Proprietorship

A majority of the small businesses in the United States are operated as sole proprietorships. This type of business organization is the simplest and is the form usually chosen by the one-person business, in which the owner and worker are the same person (although sole proprietorships can have employees). Its primary advantage is its ease of formation; its most important disadvantages are (1) it can have only one owner and (2) the owner is individually responsible for all losses of the
business.

Getting Started

Selecting a Name and Beginning

You can start a sole proprietorship simply by beginning to conduct your business. You should open a separate bank account to keep track of your business’s finances and keep records of all of the expenses and revenues connected with running the business.

A sole proprietorship is usually operated under the name of the individual owner, although other names can be used. If the name selected is not yours, you may be required to file a “fictitious name” certificate in the town, city or county in which your business is located. Care should be taken in selecting a name to ensure it is not the same or similar to the name of another business. Also, note that many states prohibit using the words “incorporated,” ‘Inc.,” “Corporation,” “Company” or “Co.” unless your business is a corporation.

Obtaining Permits and Licenses

Many states and localities require businesses to obtain business licenses or permits, no matter what type of entity is involved. Examples of the licenses often required are business licenses, zoning occupancy permits and tax registrations. You should call local government offices for information and application forms.

Control

Who Owns the Business?

If you create a sole proprietorship, all the assets of the business are owned directly by you. A sole proprietorship may be owned by only one individual–ownership by more than one person creates a partnership.

Who Controls the Business?

Generally, the owner of the sole proprietorship controls the business. If you are the owner of a sole proprietorship, you may hire employees to help you manage the business, but you will have legal responsibility for the decisions made by your employees and ultimate control over the business.

Liability

In a sole proprietorship, the business and the owner are one and the same. There is no separate legal entity and thus no separate legal “person.” This means that as a sole proprietor you will have unlimited personal responsibility for your business’s liabilities. For example, if your business cannot pay for its supplies, the suppliers can sue you individually. The business creditors can go against both the business’s assets and your personal assets, including your bank account, car or house (However, in some states, you may be able to protect your personal assets from business risks by owning them jointly with your spouse or by transferring them to your spouse or children. There may be tax and other reasons why this is not a good idea; seek the advice of a lawyer first.) The reverse is also true; i.e., your personal creditors can make claims against your
business’s assets.

Insurance may be purchased to cover many of the risks of running a sole proprietorship. Some businesses are not very risky, so the personal liability may not be a great concern. However, you should understand that if you choose to operate your business as a sole proprietorship and lose money (which insurance will not cover), you will be personally liable for the loss.

Continuity and Transferability

How Long Does a Sole Proprietorship Last?

A sole proprietorship can exist as long as its owner is alive and desires to continue the business. When the owner dies, the sole proprietorship no longer exists. The assets and liabilities of the business become part of the owner’s estate.

Can You Sell Your Business?

A sole proprietor can freely transfer a business by selling all or a portion of the assets of the business.

Taxes

A sole proprietor is taxed on all income from the business at applicable individual tax rates. The business income, and allowable business expenses, are reflected on the individual tax return. No separate federal income tax return is required of the sole proprietor. However, a proprietor must pay self-employment tax on the business income.

Pros and Cons

Pros

Cons

• Owner has unlimited personal liability for business liabilities.
• Business has unlimited liability for owner’s personal liabilities.
• Ownership is limited to one person.