A sole proprietorship is the oldest and most common type of business. It exists when only one person owns and manages a business with the intent of earning a profit. Examples of a sole proprietorship include a virtual assistant working from her home, a woodworker selling at craft fairs and a freelance consultant offering his services to local businesses. The benefits and liabilities of the sole proprietorship are different from those with other business types.
The sole proprietorship is the easiest and least expensive way to start a company. The Internal Revenue Service does not consider the sole proprietorship as a separate business entity. The owner reports income from the business on Form 1040 and pays taxes at the personal income tax rate. Local and state governments may have licensing and reporting requirements for some professions. Federal law does prohibit some types of businesses from forming as a sole proprietorship, such as banks and schools.
The sole proprietor has complete control over all decisions of the business. This freedom for self-direction and power over one’s working life is what attracts entrepreneurs. However, the owner is responsible for making sure that legal, Occupational Safety and Health Administration, accounting, insurance and other requirements comply with the laws and regulations governing his profession.
Profit and Loss
As the sole owner of your company, you keep 100 percent of the profit of your labor. If your business venture is successful, you may earn significantly more than when you had an hourly wage as someone’s employee. Conversely, you are completely responsible for all losses. Your may lose all of your personal assets, including your savings and possibly your home, if you are sued by a vendor or customer. If you work in a business where a mistake may adversely affect your clients, such as accounting or financial consulting, you may want to have liability insurance.
Differences With Corporations
Corporations have an easier time obtaining financing than a sole proprietorship. Corporations have several people making management decisions, and the entity continues in the event of illness or the death of one of the partners. Additionally, some corporations raise money through stock offerings. With a sole proprietorship, a lender is entirely dependent on the business owner's ability to repay the loan with his own labor. Nor can a sole proprietorship sell stock to raise funds for equipment or expansion.
Continuation of the Business
One drawback of a sole proprietorship is that it ceases to exist when the owner dies. Your family cannot inherit the business, since the Internal Revenue Service never recognized it as an entity separate from the individual. If you become ill or disabled, you may suffer financially if you are the only person who can make the product or provide the service.