What Is a Sole Proprietorship?

If the business outgrows the sole proprietorship, the business can change to a corporation or LLC. For other businesses, it’s better to spend a little extra and form a corporation or LLC to have liability protection. If the sole proprietor doesn’t have enough money saved up to fund his business idea, he may be unable to set up his business.

The most common type of business is a sole proprietorship, where only one person owns the company. The four main types of businesses are sole proprietorship, partnership, LLC and corporation. Similar to a sole proprietorship, the partnership doesn’t need to form a formal entity but may.

There is no legal requirement for the sole proprietor to file for who will take over the administration of the business after their death or when they can no longer manage it. A client or consumer of a sole proprietorship business dissatisfied with the quality of goods or services supplied by the company may communicate directly with the proprietor. Compared to proprietorships, other business entities require a much longer and more complex legal document for incorporation.

Unlike other business models that have a legal entity, the law cannot compel a sole proprietor to publish its financial documents and accounts to the public. There is more confidentiality in business operations in a sole proprietorship. This article describes a sole proprietorship business and discusses the major facts you need to know for starting this type of business. Since you don’t have to pay any formation fees, a sole proprietorship is an incredibly easy way to start a new business. There are no forms to file or fees to pay when you start a sole proprietorship. However, if you don’t plan to use your own name as your business name, you will need to register a Doing Business As (DBA) name or Fictitious Business Name (FBN) depending on your state.

• The downside to having the same entity as your business is that your company’s assets and debts cannot be separated from you.
• On the other hand, sole proprietorships often lack this objectivity because the owner may act based on emotions rather than rationality.
• Read on to learn more about the ins and outs of being a sole proprietor.
• Simply defined, a sole proprietorship is an individual who goes into business with the intention to make a profit.
• They may also have tax reasons for choosing to work with incorporated businesses instead.

How to register as a sole proprietor

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. Before investing in a business venture, the entrepreneurs must study the project’s feasibility to minimize risk factors. This term is also used when it comes to technology, processes, and software. If a company develops a patented process to produce its goods more efficiently than its competitors, its process is considered proprietary because no other company can use it.

Income and Expenses for Sole Proprietorships

Furthermore, the owner is also responsible for all the tax obligations of the business as it is a pass-through entity for taxation. Therefore, the proprietor has to report profits and losses of the business in Schedule C of Form 1040 while filing federal income tax for any given year. Founder Pierre Omidyar started a small online auction website as a sole proprietorship in 1995. He was working as a software developer for another company at the time and just created it as a place for people looking to trade and collect Pez candy dispensers.

Some examples of sole proprietors are freelancers, independent contractors, and gig workers, such as Uber and Lyft drivers. A sole proprietor is an individual who owns a business, conducts its affairs, and assumes responsibility for all its obligations. Therefore, all the profits of the entity are taxed as the proprietor’s personal income. Since the proprietory firm is a pass-through entity for taxation, he is liable to personal income taxes on the firm’s income.

Determine if a Sole Proprietorship Right for You

Future expenses or long-term what is a proprietor debt owed are not considered when determining how much tax a sole proprietor will owe. In other words, a sole proprietor would only be taxed on the money they have saved in their bank accounts. If a sole proprietorship fails, only the owner suffers any loss, as he gains alone if the company succeeds.

If profits are passed through, that means that you add the profits to your personal tax return. The LLC is more complex to maintain than a sole proprietorship or general partnership, as annual filing requirements exist. This makes it a good option for business owners wanting to limit liability without adding a lot of extra work. When checks are written out to the owner, even if they are written out to a fictitious name, the money will go to the owner’s bank account.

However, for a small business that is just getting started, it may be the best option that fits in the budget. A sole proprietor may file a DBA (“doing business as”) with the county clerk’s office to ensure they have a unique name that no one else can use. Since a single individual owns the sole proprietorship, there is no need for any formal legal papers detailing a part-owner and how profits are intended to be shared, as one would have in a partnership. Another reason why setting up a sole proprietorship is easy is because sole proprietorships don’t have to be registered in federal and state offices.

Famous Companies That Started out as Sole Proprietorships

In a sole proprietorship, you can’t give away shares of your company, so you would have to find other non-equity-granting ways to raise money. Many business owners—especially solo entrepreneurs without employees—choose to remain sole proprietors and not incorporate because of the simplicity. Given today’s challenging economic climate with COVID-19, it’s important to weigh the pros and cons of all the business structures. Choosing the right business structure can affect your ability to find investors and attract customers. It also impacts how much you spend to run your business, how you pay taxes and how legally protected you are.

Instead of starting a small business as a limited liability company (LLC) or corporation, many are opting for a sole proprietorship. ” The sole proprietorship definition is a business owned by one person where there’s no legal separation between the business and the owner. That means if the business gets sued, the owner can be held financially liable and may have to pay legal defense costs and settlement money using their personal assets. A limited liability partnership (LLP) is a partnership structure registered as a business entity that reduces each partner’s liability to what they have contributed. The risk for the business is spread among the partners who each have defined roles in the company. Because liability is limited, creditors cannot go after partners’ personal assets for company debts and liabilities.