A sole proprietorship is the most popular and straightforward business structure. A sole proprietorship has only one owner, and there’s no legal distinction between the individual and the business. Considered the default business entity, you are a sole proprietorship if you don’t legally form a business entity.
As such, many businesses could be a sole proprietorship without knowing it. For example, a freelance writer is probably a sole proprietor, as is an independent contractor providing services on a “sharing-economy” platform. As a business owner, understanding the benefits and disadvantages of sole proprietorships will help you make an informed decision on which business structure is ideal for your particular industry and situation.
If you don’t know which business entity is right for you, check out our video series on choosing the best type of business structure. For a general overview of sole proprietorships, see the video below; for more in-depth coverage, continue reading.
What Are the Benefits of a Sole Proprietorship?
Sole proprietorships offer several distinct advantages, including:
- Easy to set up: You can start a sole proprietorship today without filing any documents with your state.
- Preferable tax treatment: Business profits and losses “pass through” to the owner’s individual tax return.
- Minimal setup costs: Other than nominal DBA filing costs, a sole proprietorship has no significant formation costs.
- Full control: Owners can make unfettered business decisions without deferring to a board, shareholders or partners.
Why Should I Think Twice About a Sole Proprietorship?
As with other business structures, a sole proprietorship has disadvantages, namely:
- Personal liability: Since there’s no legal distinction between the business and the individual, the owner is personally liable for the debts and obligations of the business.
- Cannot bring on partners or investors: Since a sole proprietorship can only have one owner, the business cannot bring on partners or investors without changing its underlying structure.
If you want to learn more about forming a sole proprietorship, check out our step-by-step guide. For businesses that have multiple owners or want to bring on investors, read our business entity guide to determine your ideal business structure.