What is a Sole Proprietorship?

A sole proprietorship is a business that is not incorporated, so that a single individual is entitled to the entire net worth of the business, and is personally liable for its debts. The individual and the business are considered to be the same entity for tax purposes, so the individual pays personal income taxes on the profits generated by the business. A sole proprietorship is the simplest of all business entities.

Advantages of a Sole Proprietorship

There are several advantages to using the sole proprietorship model. They are as follows:

Low startup and operating costs. A sole proprietorship is less expensive to establish than corporations or partnerships. There are no mandatory legal fees, shareholder meetings, or complex financial reports.
Total control. The owner of a sole proprietorship has complete control over the business, including its operations and finances.
Direct claim on profits. The owner keeps 100% of the profits without sharing with partners or shareholders.
No government filings. It is not necessary to set up as an entity with your local government, since the business is assumed to be combined with the your personal finances. Also, given the lack of filings, there are no filing fees.
No tax filings. A sole proprietorship does not pay any income taxes, since all profits and losses flow through to the owner, and will appear your personal income tax return.
Financial confidentiality. Unlike corporations, sole proprietorships do not have to publish financial statements.
Easy business closure. The owner can dissolve the business without legal complications, so there is no need to go through lengthy dissolution processes.

Disadvantages of a Sole Proprietorship

The main problem with a sole proprietorship is that creditors of the business can obtain payment from the personal assets of the owner. This person has no way to block creditor access to his or her assets. Another disadvantage is that, with just one owner, it is difficult to gain sufficient capital to expand the business. With more owners, as would be the case with a partnership, it would be easier to raise capital.