What Is a Sole Proprietorship?
Choosing a business entity structure is one of the most crucial decisions you will make for the future of your business.
If you are looking for the simplest and least expensive business entity to start, the sole proprietorship is something to consider.
A sole proprietorship is an unincorporated business with one owner.
Individuals who operate their business are considered sole proprietors by default.
For example, individuals who sell goods and services or run a business online are automatically sole proprietors
unless they have intentionally adopted another business structure.
Sole proprietorships are typically identifiable by the owner’s name being the same as the business name.
However, sole proprietors can choose to operate under a brand name or trade name.
When you decide to form your business as a sole proprietorship, you and your business are the same legal entity.
There is no limited liability protection of your home, car, savings, and other personal assets.
What Are the Advantages and Disadvantages of a Sole Proprietorship?
As with any entity type, there are advantages and disadvantages to being a sole proprietor.
You need to be well aware of those factors prior to starting a business, so you know what to expect and what troubles you could run into.
Advantages of a Sole Proprietorship
- Simpler application process. Most sole proprietorships do not have to register with the state, as they become a business entity simply by conducting business.
However, business permits or licensing may be required, so verifying your requirements before or shortly after conducting business transactions is crucial.
- Easier banking. Sole proprietors are the only business owners that are not required to have a separate business checking account to operate a company.
You are allowed to make business payments from your own personal bank account.
However, you have the option to separate your personal and business finances if you so choose.
- Simplified ownership structure. Sole proprietors do not need to worry about company officers or board members.
Instead, owners of sole proprietorships have complete control over decisions and finances, so they can
focus on daily operations and long-term goals without worrying about stakeholders or external personnel.
Disadvantages of a Sole Proprietorship
- No liability protection. Sole proprietors are considered self-employed, so they are not afforded legal protection.
Owners are personally liable for any legal, financial, or tax problems incurred by the business.
- Potential difficulties obtaining financing. Depending on the owner’s financial situation, it can be more challenging for a sole proprietor to secure
loans or funding for their business. Banks typically want to work with established companies with more substantial credit histories.
- Harder to sell business. While it is not impossible to sell a sole proprietorship, it is not easy.
Instead of selling the company as a whole, you need to sell your business assets. Unless you have established a DBA (“doing business as”), the buyer cannot keep your business name.
Learn More From Harbor Compliance
If you are still uncertain whether the sole proprietorship structure is right for you, ask yourself the following questions:
- Are you looking to set up your own business quickly and easily?
- Do you want everything related to your business attached to you and under your control?
- Do you not want to involve partners or investors in your business?
If the answers to those questions are “yes,” then a sole proprietorship is likely the right choice for your business.
If you are looking for further business formation guidance, our filing specialists are here to help.
When you look to Harbor Compliance to set up your sole proprietorship,
we will confirm the availability of your business name, register your business name, obtain your federal tax ID (EIN), and provide ongoing support.
Harbor Compliance is also a nationwide registered agent provider.
We support your company as it grows, offering local offices with same-day document scanning.
Easy online ordering means you have service in minutes. View our service page or contact us for more information.