Overview of Sole Proprietorship
A sole proprietorship is a business owned and run by one person. The owner and the business are legally identical. All profits and losses flow directly to the owner’s personal tax return. The owner has complete control but also unlimited personal liability for debts and lawsuits against the business.
Advantages and Disadvantages
- The simplest way to start a business.
- No need for an attorney in most cases.
- Only need to register the business name and get required licenses.
- Owner pays personal income tax on profits.
- Owner has complete control and quick decision making.
Liability and Taxation
- The owner and the business are identical for tax purposes.
- Unlimited liability for financial obligations such as debt.
Sole Proprietorship vs. LLC
- An LLC separates the business assets from the owner’s assets.
Transitioning and Downsides
- Sole proprietors may operate under a personal or fictitious business name.
- The owner’s personal assets are at risk.
- Transferring ownership isn’t as simple as handing over the business.
- If the owner dies, the business usually terminates unless proper planning allows it to go to heirs or a purchaser.
Common Businesses and Transition
- Common sole proprietorship businesses include freelancers, contractors, designers, personal trainers, small online sellers, and independent consultants.
- Many small businesses start as sole proprietorships and later transition to other structures like LLCs or corporations as they grow.