Information about Sole Proprietorship

Business law
Business organizations
Basic forms:
Sole proprietorship
Corporation
Partnership (General · Limited · LLP)
Cooperative
USA:
Business trust · LLC · LLLP Delaware corporation Nevada corporation
UK/Commonwealth:
Limited company (By shares · By guarantee) (Public · Proprietary)
Civil law countries:
AB · AG · ANS · A/S · GmbH
K.K. · N.V. · OY · S.A.
European Company Statute
Doctrines
Corporate governance
Limited liability · Ultra vires
Business judgment rule
De facto corporation and corporation by estoppel
Piercing the corporate veil
Related areas of law
Contract · Civil procedure

A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.

Most sole proprietors will register a trade name or "Doing Business As". This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

Advantages

An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business. A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member, member managed LLC still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.

Furthermore, in many jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. In the United States, for example, a sole proprietorship reports its income and deductions on a Schedule C on the individual's personal return. To the IRS, a single member LLC is treated as a disregarded entity, and thereby, the owner of a single member LLC will still report income and deductions on a Schedule C on their individual . In comparison, an identical small business operating as an S Corporation or partnership would be required to prepare and submit a separate tax return. As with all flow through entities, all of the profits and losses from the business go right to the owner. A sole proprietorship often has the advantage of the least government regulations.

Disadvantages

A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is a sine qua non of bank financing. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, the proprietor is personally liable. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

In countries without a National Health Service, such as United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue. Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company, or LLC. Note that such an LLC would still be treated as a sole proprietorship for income tax accounting purposes.

References

• Hamilton, Robert W., and Jonathan R. Macey, Cases on Corporations Including Partnerships and Limited Liability Companies, 9th Ed., West Group, 2005.