What Is a Sole Proprietorship?

The most common and simplest structure you can choose to start a business is a sole proprietorship. Sole proprietorships are the most popular business structure in America because they are so user-friendly. Learn more about what a sole proprietorship is and if it is the right choice for you.

Pros of a Sole Proprietorship

A sole proprietorship is owned by one person that has an unincorporated business, if you have other partners you might want to look at the other business structures available. The owner is responsible for debts or liabilities that are incurred by the business and there is no legal separation between the business and the owner. Since you are working alone, the operation of your business will be more efficient because it is just yourself making the decisions. A sole proprietorship is ideal for startups, self-employed contractors, and part-time and home-based businesses.

Additionally, you receive all the profits that your business makes. If you have multiple partners, the profit is split between them. Also, during tax season the process for filing is easier than the other business structures since you are only a single entity. The tax rates are also some of the lowest compared to the others.

A sole proprietor reports income and/or losses and expenses by filing a Schedule C along with the Form 1040. You also need to file a Schedule SE to calculate how much self-employment tax you owe.

A sole proprietorship that loses money in the beginning can deduct the losses against personal income which makes it ideal for those who are wising to transition from employee to self-employed.

Cons of a Sole Proprietorship

Since you are the sole owner of the business, you have a lot of responsibility since your name is legally tied to your business and there is no liability available to protect you. This means that your assets may be at risk if you are not able to meet your financial obligations. Your personal assets can be seized too if you

Owners will face difficulties when trying to raise money. Banks are hesitant to lend money to sole proprietorship because of the risk that comes along with it if the business fails and cannot repay.

If at some point you want to sell your business, it is more challenging to do so because a sole proprietorship is tied to the owner. The valuation of a business is hard since there is no distinction between the assets of the owner and the assets of the business.

Although there are some cons to a sole proprietorship, it still is a popular choice among many business owners because the benefits outweigh the disadvantages. The fact that no formal filing is required and simple to form is appealing to many business owners.

Types of Sole Proprietorships

There are three types of sole proprietorships:

  • Independent Contractor – a self-employed person who takes on projects on a contract basis with clients. This person has the freedom to choose which clients to take on and how many they want that works for them.
  • Business Owner – business owners are also self-employed but there is more autonomy in how client work is completed, and the operation may even be more difficult with employees.
  • Franchise – a franchisee benefits from the guidance, brand, and business model in exchange for royalties paid to the franchisor.