A sole proprietorship is a business entity owned and run by one natural person. There is no legal distinction between the owner and the business when it comes to issues such as taxation and liability. Every asset of the sole proprietorship is owned by you and all debts of the sole proprietorship are your responsibility.
A sole proprietorship can do business under a fictitious name, but the fictitious name is simply a trade name. So, when Mary Andersson opens up The Merry Bar, The Merry Bar is just a trade name, not a legal entity separate from Mary Andersson. Mary Andersson will sign contracts in her name, and typically have customers write checks to Mary Andersson rather than to The Merry Bar.
A sole proprietorship is a popular choice among small business owners, but it is not necessarily the ideal choice for you just because you are running a small business. Before you decide to go for the sole proprietorship, you should also explore the other alternatives available to you. Do not simply chose to run your small business as a sole proprietorship because “that’s what everyone else is doing”. There are pros and cons with every type of business entity, and you might be better of forming a corporation, partnership, private limited company, cooperative, or any other business entity available in your jurisdiction. Also note that you may, under certain circumstances, be allowed to formed a business entity in another jurisdiction than the one you, the human being, reside in.
Example of advantages of a sole proprietorship
- Establishing a sole proprietorship is easy and inexpensive compared to the establishing of most other business entities.
- Since there is only one owner, there is no need for formal meetings, voting, etc for the running of the sole proprietorship.
- You don’t need a partner or fellow stockholders to form a sole proprietorship.
- In many jurisdictions, a sole proprietor is excluded from paying certain (but not all) employment taxes on himself or herself.
- A sole proprietor can commingle personal and business property and funds in a way that would be illegal for partnerships, corporations, LLC:s and many other business entities where more than one person is the owner.
Example of disadvantages of a sole proprietorship
- The owner of the sole proprietorship has unlimited liability for the debts, losses and liabilities incurred by the business. Creditors can force the owner to use his or her personal assets to pay for debts incurred by the business, e.g. personal home and retirement savings.If the sole proprietorship is sued (e.g. after an accident) and is court-ordered to pay damages, the owner is personally responsible for paying does damages. This includes situations where the owner herself did not carry out the negligence /wrongdoing but by an employee for which the sole proprietorship is responsible.
- When a sole proprietorship brings a lawsuit, it does so in the owner’s name.
- Since there are no shares, you can not sell shares to raise capital for your business.
- Every local license, liqueur license etc will be tied to your own name, which makes the business more difficult to sell. You can sell the material goods owned by the business, e.g. buildings, equipment, vehicles, etc but the buyer must (in most jurisdictions) obtain new licenses to keep running the business.
Accounting and bookkeeping for sole proprietors
In many jurisdictions, sole proprietors are not required to maintain separate accounting for the business entity and the personal assets. This might seem like a great thing for a person who is about to start their own business, but in reality it can easily lead to a messy situation. For instance, if you are not keeping a detailed and separated account of your business, it will be difficult for you to clearly see your exact profits and losses and make adjustments, where necessary, to maintain a thriving business.
While you will be working to get your newly formed business off the ground, little time and energy will be left for bookkeeping and accounting. It is therefore a really good idea to seek out some type of accounting aid, ideally specialized accounting help for sole proprietors. Accounting help might seem like an unnecessary or even frivolous expense while you are working so hard to make ends meet in your new business venture, but it can save you a lot of money and trouble both short term and long term. Also, a good accountant will free up your time and energy so you focus on your actual business – not on receipts, forms and tax law changes.