Legal Structure of a Business: Sole Proprietor

A sole proprietorship is a business owned and operated by one person. The majority of businesses are sole proprietorships; the reason being that it is very easy to establish. You do not need to file documents with the Secretary of State, you don’t have to agree with someone else, you do not need anyone’s permission; all you need to do is open the doors, and you are in business. Of course, it is a little more elaborate than that, as there are several licenses and permits that you will need, depending on your type of business. Baring those requirements, a sole proprietorship is indeed the easiest form of business ownership.

But the ease of business formation is not the only advantage. As a sole proprietor the owner makes all the decisions for the business. He or she has complete control over the management and decision-making of the enterprise. There is also a great deal of flexibility because the owner can respond quickly to any problems, and can make changes without having to consult anyone else. In addition, there are no special taxes to be paid, as there are with corporations, LLCs, and other types of entities. The profits become the owner’s personal income, and are part of his or her tax liability.

But there are disadvantages. One of the most important ones is that the owner has total liability for the debts of the business, as well as any lawsuits filed against the business. This means that the owner can lose not just all his investment, but also all his assets, including his or her personal residence. Another disadvantage is that there are limited business deductions for health insurance and workers’ compensation insurance to name a few.

Other drawbacks include difficulty in obtaining capital for the business, risk to the business if the owner becomes ill or dies, and lack of depth in experience and perspective since only one person has the responsibility and control.

If you are considering a sole proprietorship for your business, talk to other business owners who run their companies as sole proprietors, and weigh carefully the advantages and disadvantages. Additionally, make sure that you consult your attorney for more information.