Sole Proprietorship

A sole proprietorship is a single individual or couple doing business alone.

How It’s Formed: If there is just one owner of the business, a sole proprietorship is automatically created when they start doing business. The owner doesn’t need to file or register anything to set up a sole proprietorship.

How It’s Taxed: Sole proprietors report business income or losses on their personal income tax return. This is called “pass-through” taxation because the profits and losses of the business pass through to the owner’s personal tax return. Sole proprietors are also required to pay self-employment taxes (Social Security and Medicare).

Key Benefits:

  • Very easy to set up; no registration or contract needed!
  • Owner is in complete control of the business.
  • Very few legal requirements to satisfy in order to operate a sole proprietorship. Sole proprietors don’t need to hold Board meetings or pay franchise taxes, for example.

Key Downsides:

  • Doesn’t protect the owner or the owner’s assets against personal liability. Creditors and claimants (i.e., people/companies who bring claims) can go after the owner and their personal assets in addition to the assets of the business.
  • Owners generally can’t give anyone an ownership interest in the sole proprietorship, so they would be unable to raise capital by selling equity in the business.

Other Considerations:

  • Sole proprietorships are not true legal entities because they are virtually indistinguishable from the business owner.
  • While setting up a sole proprietorship doesn’t require a registration, business owners still need to comply with all applicable laws and regulations. They may need to obtain relevant permits and licenses necessary to do business, and they will need to comply with laws concerning contracts, employment, and intellectual property.
  • If the business is operating under a trade name, the business owner should still ensure the trade name is available to use and that it doesn’t violate or infringe on any third-party’s rights.
  • The owner of the sole proprietorship must report any business income or losses on their personal tax return.
    • Banks may be reluctant to lend to a sole proprietorship because there is no legal entity protecting the owner and other typical business safeguards are not in place.