What Makes a Sole Proprietor So Unique?
The Sole Proprietor vs. Other Business Owners
What is the Difference between a Sole Proprietor vs. Other Business Ownership Types?
The sole proprietor business is by far the most common business type in the U.S. There are 23 million sole proprietorships today, compared to 1.7 million traditional corporations and 7.4 million partnerships and S corporations, according to the Tax Foundation.
Yet, the sole proprietorship business is still somewhat of a mystery, in part because there is confusion about the different business types. This article specifically discusses the sole proprietor as a business owner, compared to partners in a partnership, limited liability company members, and corporate owners (shareholders), related to the business owner.
#1 - Number of Owners
A sole proprietor is a solo business owner. If you are a sole proprietor, you are the only person who owns your business. While a limited liability company may have only one member, a partnership by definition has more than one partner, and a corporation usually has more than one shareholder. The ownership of a sole proprietor business is direct and simple; there are no shares of stock (corporation), partnership percentages (partnership), or member shares (LLC).
#2 - Control by Owner
A sole proprietor has complete control of his or her company. Since there are no other owners, and no legal agreement restricting ownership, the sole proprietor can whatever is necessary to keep the business going. In a partnership or LLC structure, ownership is designated by an agreement (Partnership agreement or LLC operations agreement). In a corporation, control over the company rests with the board of directors, of which body the original owner has only partial control (even if he/she has a controlling interest.
#3 - Tax and Legal Status
A sole proprietor is unique because nothing is needed to form this business type. If you want to be a sole proprietor, you just start your business. No legal documents need to be filed.
A sole proprietorship files taxes on Schedule C of the owner's personal tax return, and the income from the sole prop is taxed at the owner's personal rate. A single-member LLC may be taxed as a sole prop, while a multiple-member LLC is taxed as a partnership. Partnership income is taxed to the partners at their personal tax rates. Finally, the owner (shareholder0 of a corporation is taxed on any distribution from the company and on dividends paid to the shareholders; the corporation pays taxes at the corporate rate.
#4 - Liability of the Owner
The sole proprietor is liable personally for the debts of the business and for negligence and other personal liability. In the LLC and corporate forms, liability of the owner is limited to the owner's investment.
As you can see from this discussion, a sole proprietorship is connected to the owner's personal taxes and part of the owner's liability. The control and flexibility of the sole proprietor is balanced with his or her liability for anything that can be a problem within the company.
#5 - Continuing Existence of the Business
Because a sole proprietor business is co-existent with its owner, if something happens to the owner, the business cannot continue. In contrast, with a partnership or LLC, if something happens to one owner, the business can continue. In a corporation, ownership is not tied to the day-to-day operation of the business, so if one owner (shareholder) leaves the company, nothing much changes.