The sole proprietorship is the default entity type for a business with one owner. If you start a business by yourself and don’t take any steps to adopt a formal business structure, you have a sole proprietorship. It’s the simplest business entity for an entrepreneur to operate, since there are no requirements to form or maintain a sole proprietorship. But at the same time, the sole proprietorship is extremely limited in its protections, and does not have the credibility that a more formal entity type confers. A sole proprietorship is fundamentally connected to its owner, and that inseparability is at the heart of the business’s strengths and weaknesses.
- Easy to create and maintain. There is no need to formally file with the state, and no required maintenance activities. Be aware, however, that you still have to follow all local requirements. Contact your city and county officials to find out if there are additional requirements you need to know about.
- Pass-through taxation. The profits from the business pass through to the owner’s tax return; there is no separate filing for the business itself.
- Unlimited liability. Any losses or obligations incurred by the business are inseparable from the owner as an individual. If creditors or lawyers come after the business, they have unlimited access to the owner’s personal assets.
- Limited life. A sole proprietorship is defined solely by the owner; the business cannot survive the owner’s death, nor can the owner sell the business for someone else to continue. The sole proprietorship only lasts as long as the founder is running it. Any “transfer” of the business would require transferring assets associated with the company piece by piece, creating what is actually an entirely new business.
Have questions about the differences in business entity types? Download our free incorporation guide.