Basics of a Sole Proprietorship
A sole proprietorship is owned and operated by a single individual. It is the easiest type of business to establish or take apart, due to a lack of government regulation. Most small businesses start as sole proprietorships. A sole proprietorship receives all profits and the owner has unlimited responsibility for all losses and debts. A sole proprietorship can own property and other assets in the name of the business and can also obtain loans, although obtaining ones can be more challenging compared to other business structures. A key takeaway is that sole proprietorships have fewer reporting requirements, but it is essential to keep accurate records for tax purposes.
Legal and Financial Aspects
The owner of a sole proprietorship is personally responsible for its debts and enjoys all profits earned. The proprietor also has unlimited liability, which means personal property can be used to meet business obligations. A sole proprietorship can bring lawsuits and be sued under the owner’s name. The owner has full control and ownership of assets, and also personally owes any loans taken for the business.
Sole proprietorships are required to report business activities for tax purposes, but are not required to have a separate EIN or file separate business taxes. Understanding advantages and disadvantages to a sole proprietorship is an investment worth making before deciding to form one.
Operations and Continuity
Sole proprietors have a harder time taking breaks, as stepping away essentially pauses operations. Whereas a corporation continues with or without the owner present. This can make vacations challenging for a sole proprietor who lacks anyone to handle things while away.
A sole proprietorship ceases to exist when the owner dies. The owner’s assets would enter probate with the rest of their estate. Under probate, assets get distributed according to the owner’s will or by state law if no will exists.
Insurance and Liability
Obtaining business insurance is essential to protect personal assets from liability claims. As there is unlimited liability, a lawsuit against the business could expose the owner’s home and bank accounts without adequate coverage.
Ownership and Decision-Making
A sole proprietorship is owned and operated by one person. This individual has unlimited liability for the business. A sole proprietorship and its owner are legally the same.
Sole proprietors have full control over their business. They make all decisions without needing approval. This avoids disputes that can happen with multiple owners.