Meaning of sole proprietorship:

In a proprietorship, the enterprise is owned and controlled by one person. He is master of his show. He sows, reaps, and harvests the output of this effort. He manages the business on his own. If necessary, he may take the help of his family members, relatives and employ some employees.

It is simplest and most common form of business ownership in which only one individual acquires all the benefits and risks of running an enterprise. It is by far the most popular business structure for startups because of its ease of formation, least record keeping, minimal regulatory controls, and avoidanceof double taxation.

Advantages For Sole Proprietorship

  • 1 Person Required as Single Entrepreneur.
  • Easy to Start and Easy to Close.
  • Complete Control.
  • Lower Cost of Formation and Compliance.

FAQs on Sole Proprietorship:

What are the advantages of a sole proprietorship?

A sole proprietorship is the easiest and least expensive type of business to start. It provides the business owner with the freedom and autonomy of complete oversight and control of the business. Under the law, the business and the person who owns it are considered to be one entity. As a result, the sole proprietor owns all the assets and is entitled to all the profits. If a sole proprietorship incurs losses the sole proprietor may apply those losses against other earned income to reduce personal income tax.

What are the disadvantages of a sole proprietorship?

As the owner of a sole proprietorship, you have unlimited liability. This means that you will be held personally responsible for any debts, liabilities or obligations that your business may incur.

How does a sole proprietorship differ from other company forms?

A sole proprietorship differs from other forms of business in several ways. The chief ways a sole proprietorship is different include:

1. Sole proprietorships are the least complex and cheapest form of doing business

2. Sole proprietorships require no formal paperwork to set up and don't need to be registered with the state

3. Sole proprietorships do not shield individuals from liability for their business debts

4. Sole proprietorships are treated as simple income for tax purposes, and do not need to have separate taxes prepared

How are sole proprietorships treated for tax purposes?

Unlike corporations, sole proprietorships are not treated separately by the IRS. This means that any profit derived from your sole proprietorship is treated as your personal income and is accounted for on your individual tax return. Any such income is taxed to you in the year it was received.

Am I personally liable for my business under a sole proprietorship?

Yes. Unlike other forms of incorporation, you are personally liable for any of your sole proprietorship's debts or legal judgments against your business. This means that in order to satisfy debts owed by your business, debt collectors can come after your personal assets -- homes, cars, etc. For this reason alone, you should be extremely cautious about setting up a sole proprietorship.

Do I need an attorney to help me start a sole proprietorship?

Not necessarily. But every business is unique and there may be circumstances where a partnership, LLC, or some other kind of business structure is a better fit. You also may want to get more insight into the specific liabilities your sole proprietorship may face.