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Sole Proprietorship Definition, Meaning | IASourceLink

Posted by Sophie Troxell on Oct 07, 2021


What is a Sole Proprietorship?

The definition of a sole proprietorship is an incorporated business where one individual runs the business. That individual is entitled to all profits, but is also responsible for all losses and liabilities. The business and individual are one, without distinction between the two. This is different from an LLC as no separate legal entity is created. If you are the sole owner of a business, registering as a sole proprietorship might be the best option for you. It’s an especially popular choice for sole business owners, individual contractors, and consultants.  

Advantages of a Sole Proprietorship

One major benefit of a sole proprietorship is that it’s the easiest type of business to start — and the easiest to end, due to lack of government regulation. Also tied to lack of regulation, it does not cost a large amount to create or maintain the business under a sole proprietorship. You may need to obtain a license or permit for the business , but you won’t need to register it with the state.

There’s also a tax advantage, since the owner only pays personal tax on the profits earned. Taxes are simpler, too. The main reason is that you don’t need to obtain an employer identification number, or EIN from the IRS. You can if you so choose, but you can also use your own social security number. Similarly, you don’t need a business checking account when you start a sole proprietorship, as is required with other business structures. You can use your own personal checking account to conduct all business transactions.

Disadvantages of a Sole Proprietorship

The largest disadvantage of a sole proprietorship is not having government protection. All liabilities are the responsibility of the business owner, giving you no protection against creditors seizing your personal assets, like you would with other business structures. 

As a sole proprietorship, it may be difficult to obtain bank loans or lines of credit. That’s because banks prefer to keep risk low, and work with companies who already have a positive track record. If business is booming and the company doesn’t require capital funding, this may not be a problem, but it can turn into one if the business begins to struggle and the losses begin to fall entirely on the business owner. 

Consider what happens if the business expands. Most likely, you'll need to restructure into an LLC. That means additional paperwork and processes to put into place, requiring time and energy many business owners don’t have. If you expect to grow quickly, registering as a sole proprietorship isn’t the most efficient decision.

How to Register

To register your business as a sole proprietorship, visit your county recorder’s office to file a Trade Name Form. It only costs about $7 and does not require renewal. The form will be valid until you either file to end the business or the recorder’s office revokes the form, making it one less thing you have to worry about. 

Starting a business can be a difficult endeavor filled with massive decisions, but we’re here to make it easier. To compare sole proprietorships to other structures, check out our guide on business structures and registration