A
sole proprietorship, also known as the sole trader or simply a proprietorship,
is a type of business entity that is owned and run by one individual and in
which there is no legal distinction between the owner and the business. Some formal
definitions of a sole proprietorship are "a business owned by one person
who is entitled to all of its profits"
(Glos & Baker) and "a business owned and controlled by one man even
though he may have many other persons working for him" (Reed & Conover).
The
individual entrepreneur owns
the business and is fully responsible for all its debts
and legal liabilities. The owner receives all profits (subject to taxation
specific to the business) and has unlimited responsibility for all losses and
debts. Every asset of the business is owned by the proprietor, and all debts of
the business are the proprietor's. This means that the owner has no less
liability than if they were acting as an individual instead of as a business.
It is a "sole" proprietorship in contrast with partnerships.
More than 75% of all United States businesses are sole proprietorship.
Examples include writers and consultants, local restaurants and shops, and
home-based businesses.
A sole proprietor may use a trade name or business name other
than his or her legal name. In many jurisdictions, there are rules to enable the true owner of
a business name to be ascertained. In the United States, there is generally a
requirement to file a doing business as statement with the local authorities.
In the United Kingdom, the proprietor's name must be displayed on business
stationery, in business emails, and at business premises, and there are other
requirements.
KEY
POINTS
·
In a sole
proprietorship,
there is no legal distinction between the individual and the business. Thus,
every asset is owned by the proprietor,
and they have unlimited liability.
·
Examples include writers and consultants, local
restaurants and shops, and home-based businesses.
·
A sole proprietor may use a trade name or
business name other than his or her legal name.
EXAMPLE
·
An example of a sole proprietorship is an
individual who runs a local food truck and would be listed as such with the
city.
Advantages
of Sole Proprietorship
The sole proprietor form of business ownership is the most
common form in the United States and also the simplest. In this form of
business ownership, an individual proprietor owns the business, manages the
business, and is responsible for all of the business' transactions and
financial liabilities. This means that any debts incurred must
be paid by the owner. This form of business has several advantages.
1. Quicker Tax Preparation
As a sole proprietor, filing your taxes is generally easier
than a corporation. Simply file an individual income tax return (IRS Form
1040), including your business losses and profits. Your
individual and business incomes are considered the same and self-employed tax
implications will apply.
2. Lower Start-up Costs
Limited capital
is a reality for many start-ups and small businesses. The cost of setting up
and operating a corporation involves higher set-up fees and special forms. It's
also not uncommon for a lawyer to be involved in forming a corporation.
3. Ease of Money Handling
Handling money
for the business is easier than other legal business structures. No payroll
set-up is required to pay yourself. To make it even easier, set up a separate
bank account to keep your business funds separate and avoid co-mingling
personal and business activities.
4. Government Regulation
Sole proprietorships also have the least government rules
and regulations affecting it. They do need to comply with licensing requirements within the states in which they do
business and they do need to pay attention to local regulations. However, the
paperwork required is much less than large corporations. Thus, they can operate
quite easily. Sole proprietorships also do not pay corporate taxes.
5. Sale and Inheritance
The sole
proprietor can own the business for as long as he or she decides, and can cash
in and sell the business when they decide to get out. The sole proprietor can
even pass the business down to their heir, a common practice.
Disadvantages:
The main disadvantages to being a sole proprietorship are:
1. Unlimited liability: Your small
business, in the form of a sole proprietorship, is personally liable for all
debts and actions of the company. Unlike a corporation or an LLC, your business
doesn't exist as a separate legal entity. Therefore, all of your personal
wealth and assets are linked to the business. For instance, if you
go bankrupt and owe your debtors $100,000, then that money will have to come out
of your own wallet even if there is no money left in the business. If you
operate in a higher risk business, such as manufacturing or consumables,
the cost to benefit ratio is favorable toward a corporate structure.
1. Lack of financial controls: The looser
structure of a proprietorship won't require financial statements and
maintaining company minutes as a corporation. The lack of accounting controls can result in the owner being lax about
financial matters, perhaps falling behind in payments or not getting paid on
time. It can be a serious issue if financial controls are not strictly managed.
2. Difficulty in raising capital: Imagine your
business in five years. Will it still be a business of one? Growing your small
business will require cash to take advantage of new markets and more
opportunities. An unrelated investor has less peace of mind concerning the use
and security of his or her investment and the
investment is more difficult to formalize; other types of business entities
have more documentation. Outside investors will take your company more serious
if you are a corporation.