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What is a Sole Proprietorship?

Updated: Oct 13, 2020

The Sole Proprietorship is a simple structure frequently used by people starting a business. In fact, a person may utilize the sole proprietorship without even knowing it, because no formal action is required to form one.


A sole proprietorship is automatically formed when a person starts a business and begins to participate in “business activities.”


If you are operating a business, i.e. selling crafts on etsy, selling goods at a farmers market, operating a food truck, etc. and have not done anything to officially form that business, you are operating a sole proprietorship.





There are a couple of advantages of operating your business as a sole proprietorship including, it is very easy to get started, there are no required filings or registrations (except taxes), and the business owner has complete control over the business.


But with that complete control comes some disadvantages, primarily, there is no liability protection. Any liabilities of the business become the owners liabilities as well.


Let’s dive in.


 

Advantages of a Sole Proprietorship


  1. Easy and inexpensive to form. Filing with your city and county will not likely cost much. And that is all you will have to pay. Unless you are going to use a name other than your own to operate the business, then you will need to file for a fictitious name with the State of Missouri, there is a $7.00 fee to do so.

  2. The business owner has complete control over all decisions. You are the sole business owner, you enjoy all of the profits, and you will not have anyone else making decisions for your business. Of course the owner of a single-member LLC typically has the ownership power, but starting an LLC requires is not as easy as starting a sole proprietorship.

  3. Taxation. Sole proprietors enjoy pass through taxation. This means any money your business makes is taxed through the business owners personal taxes.


Disadvantages of a Sole Proprietorship

  1. There is really one big disadvantage to operating as a sole proprietor, which is unlimited personal liability. An LLC offers liability protection to business owners, a sole proprietorship does not. This means any debt, lawsuit, or obligation owed by the business can be recovered against the business owners personal assets. Thus the primary reason a person would choose to operate an LLC or Corporation instead of a sole proprietorship is to avoid placing personal assets at risk.

  2. Some other disadvantages of a sole proprietorship are that it may be harder to raise money as the business cannot use ownership as an incentive to lure investors and banks may be reluctant to loan money to a sole proprietorship. Another disadvantage is the lack of a business partner, business partners are often very important to the success of a new business, and by nature, a sole proprietorship does not allow a partner. This is only a small disadvantage however, as changing from a sole proprietorship to a partnership or LLC is not a difficult task and would allow a person to bring on a partner or partners.


The Sole Proprietorship is a good place for a business to start out. It is simple. One less thing for the busy new business owner to worry about.


However, if a sole proprietorship begins to grow, it is a good idea to form as an LLC or Corporation to enjoy liability protections and to create a better structure for future growth.





If you are a small business owner, or are thinking about starting a business, and have questions about what direction you should take, please contact Hometown Law.


At Hometown Law we want to help you and your business find success and avoid the many pitfalls a new business owner may experience.


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