Business Entities Explained: Sole Proprietorship
A sole proprietorship is not a business entity but references a business owned by one person. As the sole owner, the sole proprietor is entitled to all of the business's profits and must bear all of its losses. Other than insurance coverage, there is no "shield" from liabilities incurred in the operation of the business.
Advantages
Absence of Statutory or Other Formalities
As no legal entity is created, anyone can start a business as a sole proprietor without many formalities. The name of the business should be registered as a "fictitious name” but, generally, there are no other formation or organizational documents or filings needed.
Complete Management Control
A sole proprietorship is a type of business that is completely and automatically linked to you individually, giving you complete control not only over the company but also over its direction. You are free to change the company's strategy and plan at any time.
Simpler Tax Setup
When compared to other entity types, the sole proprietorship has the simplest tax requirements. Income is taxed only once at the individual owner’s income tax rate. Income is reported on the owner’s tax returns; there is no other tax return needed.
Disadvantages
No Liability Protection
Although being a sole proprietorship appears to be a great idea because you make all of your own business decisions, it can also be a disadvantage. Without the limited liability protection provided by incorporation, you are personally liable for any of your company's legal, financial, or tax issues. All of your personal assets, regardless of whether they are used in the business, are at risk to creditors of the business.
Limited Access to Finance
Proprietors cannot raise funds by selling shares or interests in their business – you cannot have any investors. Any expenses must be financed by working capital.
Who Should Use the Sole Proprietorship Business Structure?
Although sole proprietors are not required to follow formalities such as voting and meetings associated with more complex forms of business, if you choose this type of structure, obtain insurance to cover any operational risks and try to avoid debts.
‘’As someone who is familiar with various types of entities, I know sole proprietorships are popular for those starting out on their own. They are very simple and straight forward but the fact that all of your personal assets are at risk limits the types of business for which this is a suitable model.’’ - John
