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What is a sole proprietorship?

A sole proprietorship is a type of business organization. It is the simplest form of legal business structure in the United States and is often the structure entrepreneurs begin with when they start a small business. Like any other business structure, the sole proprietorship has benefits and disadvantages.

Major advantages of a sole proprietorship are that it is easier and less costly to begin structures such as limited liability companies and corporations. In most cases, you have to complete a short form and might have to purchase a local or state business license. The actual requirements and costs can vary by industry.

A sole proprietorship also provides you with complete control of your company. You aren't sharing control with partners or shareholders, which can be freeing and allow you to grow your business in unique ways. One the flip side, you are completely responsible for your companies, which can create tax and debt burdens for you individually.

With a sole proprietorship, your personal liability with regard to the company is unlimited. In many cases, you are seen as the same entity, so a lawsuit against the company is a lawsuit against you and your personal assets are at risk. Depending on the type of work, product or service you perform, this can be a serious risk.

It can also be difficult to raise money for your business as a sole proprietorship. Your credit score and assets might come into play, whereas they are less important in structures such as a corporation.

Understanding the legal benefits and disadvantages of various business structures helps you choose the right one for your business and situation. Forming a business can be a complex endeavor, and consequences can be large if you make mistakes. Working with a professional helps you reduce the costs of mistakes in your business's future.

Source: Small Business Administration, "Sole Proprietorship," accessed Dec. 04, 2015

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