What is a Sole Proprietorship?
The sole proprietorship is an extremely common business organizational strategy where a business is owned exclusively by a single individual. Exclusivity is not the only feature of such an organization. The way the business is taxed, especially in places like the US, is a very important consideration. Instead of having a corporation that is taxed separately, the owner reports profits and losses on individual income tax returns. Another feature of this type of ownership is that the proprietor is in no way protected from business losses, and should the business lose money or owe money to creditors, the owner’s assets are at risk for being lost.
Despite the risk to personal assets, there can be significant advantages to having a sole proprietorship. The business owner doesn’t answer to a board, stockholders or shareholders. There is often limited paperwork associated with beginning this type of business organization, or in some cases there may not be any paperwork or registration involved at all. Another plus for many small business owners is they don’t have to fill out separate earnings reports for their business, though they still must keep track of profit and losses and fill out statements when reporting taxes, about losses or gains. Yet all money earned can be allocated anywhere at the discretion of the owner, and he or she can keep any profits as income.
Many businesses begin as a sole proprietorship and they might remain that way if the owner has no interest in expanding beyond a certain point. If a business grows significantly and there is greater potential for liability lawsuits, owners might choose to incorporate their businesses to protect personal assets. As long as the business remains in sole proprietorship status, everything belonging to the owner, including cash, property, or investments, can be seized if debts are unpaid or someone successfully sues the owner. This might not be a huge issue for someone with few assets and a small business with little risk of inviting lawsuits, but a larger business conducted as a sole proprietorship by someone with significant assets is not always a good idea.
When people are deciding how to start a business, they should consider some of the features of a sole proprietorship to determine if it’s the best choice. It is admittedly true that this is the cheapest way to begin a business, often doesn’t require paperwork to start, and it offers significant control and decision making to the owner. Banks and other lenders usually won’t loan money to expand sole proprietorships because of the lack of oversight and small resources, unless that expansion would include incorporation of the company. Lastly, while offering greater freedoms in decision-making, this business type does not protect the owner’s personal assets, and thus hazards greater personal financial risk.
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