What is a sole proprietorship?

A sole proprietorship means someone who owns an unincorporated business by himself or herself. A sole proprietorship is a business that can be owned and controlled by an individual.

Author: Brad Nakase, Attorney

Email  |  Call (888) 600-8654

The legal status of a sole proprietorship can be defined as follows: It is not a separate legal entity from the business owner. A sole proprietorship is a non-registered, unincorporated business run solely by one individual proprietor with no distinction between the business and the owner. The sole proprietorship is the simplest business form under which one can operate a business. Sole proprietorships do not produce a separate business entity. You can be held personally liable for the debts and obligations of the business. This means your business assets and liabilities are not separate from your personal assets and liabilities.

In this article, our Los Angeles business attorney discuss sole proprietorship as follows:

What Is a Sole Proprietorship in Business?

According to the IRS, a sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietorship is a non-registered, unincorporated business run solely by one individual proprietor with no distinction between the business and the owner. A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned.

A sole proprietorship, also known as a proprietorship is an unincorporated company that has only one owner. This owner pays personal income tax on the business’ profits. Often, sole proprietors conduct business using their personal names because they do not need to create a unique trade or company name.

A sole proprietorship is one of the easiest business entities to create and get rid of. This is because of very little government regulation. Because of this, sole proprietorships are one of the most popular entity types among entrepreneurs, consultants, and self-contractors. A majority of small businesses begin as sole proprietorships and then expand into a limited liability company or corporation.

If an individual wishes to begin a single-owner business, then the easiest option is a sole proprietorship. A sole proprietorship starts right as the entrepreneur begins conducting business. In fact, there is no need to file state or federal documents, and there are very few regulatory duties. This is a great option for entrepreneurs who are just getting started.

A sole proprietorship is a lot different from a limited liability company, a corporation, and a limited liability partnership. Largely, this is because no separate entity is created with a sole proprietorship. This means that a sole proprietorship’s owner is not protected from their business’ liabilities and obligations.

For instance, the company’s debts count as the owner’s debts. That said, the company’s profits also belong to the owner because all profits go directly to the owner.

Key Points

  • A sole proprietorship is an unincorporated entity type that has only one owner. This owner pays personal income tax on the company’s profits.
  • Sole proprietorships are easy to create and take apart thanks to lax government regulation. This means they are very popular with entrepreneurs.
  • One of the big disadvantages of sole proprietorships is that there is no government protection because they are not registered. This means that the owner is responsible for all the company’s liabilities.
  • Sole proprietors document their income and expenses on personal tax returns and pay income and elf-employment taxes on the company’s profits.

What Are the Pros and Cons of a Sole Proprietorship?

Pros

  • Easy to start a small business.
  • Owner has complete control and flexibility to run the business.

Cons

  • Owner is personally liable for business debts and liabilities.
  • Creditors can go after your personal assets.

The owner of a sole proprietorship does not have to complete a bunch of paperwork to register the company with the state in which it operates. Depending on the kind of business and the particular state, a business owner may have to get a permit or license. However, less overall paperwork means that a business can get going faster.

The process of filing taxes is also a lot simpler with sole proprietorships because a company does not have to get an employer identification number (EIN) from the IRS. A business may still choose to get an EIN, but a businessperson may choose to instead use their own Social Security number to file taxes. That said, there are other important reasons to file for an EIN. If a business owner wishes to sell taxable products, he or she will have to register for a sales tax license with the state. Also, if a business owner intends to hire employees, he or she will need to get an EIN from the IRS.

A sole proprietorship does not require a company checking account, which other entity types need. A business owner can simply manage their finances through their personal bank account.

The cons of running a sole proprietorship include the lack of liability protection and the trouble involved in getting access to capital financing, especially via issuing equity and getting credit lines or bank loans.

When a company goes through the registration process, it enjoys some protections. A sole proprietorship, with no registration, offers no liability protection to its owner. Conversely, an LLC offers protection to its owner against creditors who attempt to seize the owner’s personal assets, like their car or house.

It can be hard for a sole proprietorship to access financing. Banks tends to prefer working with businesses that have an established track record. They typically consider those just getting off the ground with a meager balance sheet to be risky borrowers. It can also be hard to get equity from big investors.

This means that entrepreneurs who start out as sole proprietors risk unlimited liability. But as the business expands, it is common for it to become a limited liability company or a corporation.

How to Switch from Sole Owner to Limited Liability Company (LLC)

Normally, when a business owner wants to incorporate his or her business, they must restructure the company into a limited liability company. To be successful, the owner needs to first make sure the name of the business is free for use. If the name is available, then the owner must then file articles of organization with the secretary of state’s office in the state where the company operates.

After the appropriate paperwork has been submitted, the owner needs to form an operating agreement, which identifies the company’s structure. The last step will be to get an EIN from the Internal Revenue Service.

Summary

A sole proprietorship is a simple, easy way for a new entrepreneur to start a business. There is no need to register the company with the state, and in general, there is overall less bureaucratic hassle involved. There are some negatives, such as liabilities passing through to the individual and difficulty getting funding. However, those risks are not as big a deal for newer businesses just getting off the ground. But as the business expands, it may be a good idea to switch entity types.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment Law

Most recent blogs:

Material Breach of Contract

A material breach of contract occurs when a party fail to perform a contract's terms making the primary purpose of the contract not met, the breach is considered material.

What Type of Business Is a Partnership?

A partnership is the simplest business structure where two or more people are owners of a business. The types of business partnerships include general partnership, limited partnership, and limited liability partnership.

What Is Company Culture?

A company culture is how things get done in the workplace. Company culture can more be described as core values or operating principles used to set the tone for the company's overall operations and success.

What is a sole proprietorship?

A sole proprietor is someone who owns an unincorporated business by himself or herself. A sole proprietorship is a business that can be owned and controlled by an individual.

Sole Proprietorship vs. LLC

Sole proprietorships are popular for self-employed professionals, freelancers, and contract workers, while LLC offers personal liability protection than sole proprietorship.

Is it legal to sell homemade food in California?

Yes, you can sell food from home so long as you have California-required health and food handling permits and business licenses. You must get a permit to sell food from home from the county health department in California. 

How to Incorporate a Small Business in California?

To incorporate a small business in California, file an Articles of Incorporation with the California Secretary of State's office. After you file the Article of Incorporation, create corporate bylaws, and elect your initial director(s).

6 Steps for Planning a Business Grand Opening

1. Create Goals for the Event, 2. Begin Planning Early, 3. Stick to the Budget, 4. Have the Right Insurance, 5. Advertise Before the Event, 6. Offer Food and Entertainment

10 Facts About Business Before Starting A Business

1) More than 50% of new businesses survive their first year in business. 2) Less than 50% of family-owned businesses are passed to their children. 3) 40% of business experience challenges in the supply chain…

S Corp vs C Corp – Differences and Benefits

The main difference between an S Corp and a C Corp is that for a C Corp, the corporate profit is taxed to the company, and the dividends to the shareholders are also taxed. In contrast, for an S Corp, the profit is taxed to the shareholder but not to the corporation. Generally, small businesses are S Corps, and major companies are C Corps, e.g., Apple, Microsoft, Caterpillar, John Deer, etc.

How to Form a Corporation in California?

To form a corporation in California follow these steps: 1) Write a one page Article of Incorporation, 2) File the Article of Incorporation with the California Secretary of State, 3) Elect corporate board of directors, 4) File Statement of Information with Secretary of State.

What are the benefits of a corporate lawyer?

The are many benefits of hiring a corporate lawyer for your business which includes: avoiding litigation, enforceable contracts, develop employee policies, proper licensing, etc.

What is Commercial Litigation?

Commercial litigation refers to litigation (lawsuit) that involves commercial or business disputes in court between two or more parties.

How to Get Rid of a 50 50 Business Partner.

How to Get Rid of a 50/50 Business Partner. One method to get rid of a 50/50 partner is to file a business partnership dissolution in the state your company was formed to end the partnership.

Personal Assistant Scam

A personal assistant scam typically involves a perpetrator putting out an ad to hire a personal assistant. Then, when the perpetrator purportedly hires the personal assistant, the assistant is asked to buy something with their own money with the promise to be repaid. The perpetuator then disappears after receiving the goods.

Fiduciary Responsibility Definition

A fiduciary responsibility refers to an organization that must put another person’s best interest first. A fiduciary duty is the highest standard of care in law. For example, a lawyer owes a fiduciary responsibility to the clients, a doctor owes a fiduciary duty to a patient, and a trustee owes a fiduciary duty to a beneficiary.

What is profit formula and how to calculate profit formula?

A business profit is revenue minus expenses. The profit formula in accounting calculates the net gains or losses incurred by the business for a period by subtracting the total expenses from the total income: Total Income – Total Expenses - Profit

What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Marketing Transport Company

The easiest way of growing your list of clients is to schedule a meeting with businesses that do a lot of shipping and introduce your transportation company. Then, engage an internet presence to market your transportation business.

What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Disruptive Business Model

Disruptive business models are disruptive innovations that bring new business ideas or technology to existing markets. A disruptive business does not fit the profile of a standard business model. Amazon is considered as one of the world's most disruptive companies.

How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

How to Get a Small Business Grant

You can get a small business grant from the Small Business Administration. Also, check your local government for small business stimulus grants.

Pros and Cons of Etsy

Etsy Pro: Your products are given a large audience, and you easily sell your merchandise. Etsy Cons: You can only sell handmade or vintage merchandise, and there are many competitors.

What is a Breach of Contract in California?

A breach of contract in California arose when a party to a contract failed to achieve a legal duty the contract created. When a party to a contract fails to fulfill the terms of a binding contract, they are liable for damages for breaching the contract.

Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.

LLC vs DBA

The main difference between an LLC and a DBA is that an LLC is a business entity, and a DBA is a registered fictitious business name. Sole proprietors, general partnerships, and LLC can register for a DBA.

Contact our attorney.

Please tell us your story:

1 + 1 = ?