A sole proprietorship is an unincorporated business owned and run by one individual. Although sole proprietorships are unincorporated, they are recognized by the IRS and state tax agencies as businesses.
Because sole proprietorships are unincorporated, they have no shareholders, and there are no stock certificates or other formalities necessary to set up. A sole proprietorship is simply a business owned and operated by one individual.
In many cases, the use of a trading name, doing business as (DBA), is used in place of the individual’s name.
Advantages of a Sole Proprietorship
1. Easy to set up. The process of creating a sole proprietorship is the simplest of all business types. You only need to register your business with your state and local authorities, and you’re ready to start.
2. Low cost. The cost of starting a sole proprietorship is minimal. You can get by with a minimum amount of equipment and the cost of filing your business name.
3. Potential to earn a significant income. Since you are the only owner of the business, you will receive all profits from your efforts.
Disadvantages of a Sole Proprietorship
1. Legal liability. The biggest disadvantage of a sole proprietorship is the exposure to personal liability. If the business incurs debt or has a lawsuit filed against it, you are personally liable for its debts and claims.
2. Limited ability to raise capital. In a sole proprietorship, you are limited in your ability to raise capital. You can’t sell shares of ownership to investors at any time, and you can’t take on investors later on, either.
3. No corporate tax advantages. Since a sole proprietorship is not an official entity, it does not provide the same corporate tax advantages that other business types offer.
Is Sole Proprietorship Good for Small Businesses?
Starting a sole proprietorship is an excellent way for individuals who are just getting into business to test the waters and see if entrepreneurship is right for them. Because of its simplicity, a sole proprietorship may be the most appropriate business type for start-up entrepreneurs who are looking to minimize expenses.