A sole proprietorship is one of the three primary entities for forming a business (the others being partnerships and corporations.)
A sole proprietorship is distinguished by being owned and run by one person; there is no legal separation between the owner and the business. The owner bears direct responsibility for all elements of the business and is fully accountable for all finances, including debts, loans, and losses.
What You Need to Know
It's important to note that a sole proprietorship is taxed as an extension of the owner, and as a business grows, it can be legally restructured to become a partnership or a corporation. Keep the following information in mind when considering a sole proprietorship for your business:
- Despite the fact that an owner might carry a special business name, the owner receives all profits and has total liability for all losses and debts. Another important exception to the sole proprietorship rule is that the IRS allows the spouse of a sole proprietor to work in the business without being considered a partner. This stipulation makes it possible to retain an additional worker and still be considered a sole proprietorship status.
- Registration of a sole proprietorship is simple. The process involves the selection of a business name, and filing a "doing business as" (DBA) with the local tax authorities. A sole proprietorship is not considered a "legal entity" since there is no distinction between the business and the owner. The business and the owner are considered to be one and the same.
- As a sole proprietor, the owner can hire employees and independent contractors, and may ask the hired help to make decisions that affect the way the business is run.
- Regardless of the point above, the owner of a sole proprietorship holds unlimited liability for the business, including full responsibility for all of the debts and/or losses that result from business operations. In turn, the owner is entitled to all of the profits generated by doing business.
- Another key benefit of a sole proprietorship is that when forming the business (and throughout the life of the organization) the owner has total rights to the conduct of the brand. This means that the owner does not have to concern themselves with the intent of partners, a board of directors, or virtually anyone else who might have an interest in the enterprise. The operations and maintenance of the business is entirely the result of the business owner's right.
Financing a Sole Proprietorship
The owner of a sole proprietorship has a number of options available when it comes to obtaining business financing. This includes loans from the U.S. Small Business Administration (SBA), which has an inherent interest in helping small businesses succeed. These loans are not originated by the SBA, but the administration does guarantee loans to small businesses from independent lending institutions.
The SBA is also able to facilitate alternative means of financing, such as government grants and stipends. In these cases, however, it's important that sole proprietors understand that certain criterion must be met such as business size, income standards, employee diversity, among other variables. Local government bodies and economic development agencies also give grants based on a business's ability to stimulate the local economy in which it exists.
Just like any form of business, a sole proprietorship has advantages and disadvantages. Those interested in sole proprietorship should conduct a careful analysis of the needs, risks, and ambitions of the venture to make a proper determination as to which type of business entity is best.