Sole Proprietorship

Business, Legal & Accounting Glossary

Definition: Sole Proprietorship


Sole Proprietorship

Quick Summary of Sole Proprietorship


A sole proprietorship is a business that one person owns, operates, and in many cases creates. It is the most common type of business organization. The sole proprietorship is also the simplest to start or terminate, the simplest to manage, the oldest, and subject to the least state or federal regulation. Freelancers and independent contractors frequently use the sole proprietorship form. Unlike limited partnerships and corporations, the sole proprietorship does not create a legal entity separate from the owner. However, profits from a sole proprietorship business are treated as the owner’s personal income and taxed accordingly. In addition, a self-employment tax is assessed by the IRS on the net income of the sole proprietorship. The owner of a sole proprietorship is also personally responsible for all debts or other liabilities incurred by the business and can be driven into bankruptcy if the sole proprietorship goes bankrupt. Finally, a sole proprietorship may have more difficulty obtaining a bank loan or line of credit than other forms of business. For that reason, the owner of a sole proprietorship may choose to transition into a limited liability company (LLC), S Corporation, or other forms of business structure, if the business is successful and grows.




What is the dictionary definition of Sole Proprietorship?

Dictionary Definition


A business owned and managed by one person (or for tax purposes, a husband and wife). For IRS purposes in the US, a sole proprietor and her business are one tax entity, meaning that business profits are reported and taxed on the owner’s personal tax return. Setting up a sole proprietorship is cheap and easy since no legal formation documents need be filed with any governmental agency (although tax registration and other permit and license requirements may still apply). Once you file a fictitious name statement (assuming you don’t use your own name) and obtain any required basic tax permits and business licenses, you’ll be in business. The main downside of a sole proprietorship is that its owner is personally liable for all business debts.


Full Definition of Sole Proprietorship


A sole proprietorship, or simply proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a “sole” proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in their own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.

Most sole proprietors will register a trade name or “Doing Business As”. This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

Advantages

An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business. A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual’s non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member, member-managed LLC still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.

Furthermore, in many jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. In the United States, for example, a sole proprietorship reports its income and deductions on a Schedule C on the individual’s personal return. To the IRS, a single-member LLC is treated as a disregarded entity, and thereby, the owner of a single-member LLC will still report income and deductions on a Schedule C on their individual. In comparison, an identical small business operating as an S Corporation or partnership would be required to prepare and submit a separate tax return. As with all flow-through entities, all of the profits and losses from the business go right to the owner. A sole proprietorship often has the advantage of the least government regulations.

Disadvantages

A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is a sine qua non of bank financing. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, the proprietor is personally liable. The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

In countries without a National Health Service, such as the United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue. Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company, or LLC. Note that such an LLC would still be treated as a sole proprietorship for income tax accounting purposes.


Examples of Sole Proprietorship in a sentence


He runs his three small restaurants as a sole proprietorship as he doesn’t feel he needs the liability protections offered by incorporation.
Many small businesses are sole proprietorship, at least in the beginning.


Related Phrases


Corporation
Partnership


Sole Proprietorship FAQ's


What Is A Sole Proprietorship?

A business structure in which an individual and his/her company are considered a single entity for tax and liability purposes. A sole proprietorship is a company that is not registered with the state as a limited liability company or corporation. The owner does not pay income tax separately for the company, but he/she reports business income or losses on his/her individual income tax return. The owner is inseparable from the sole proprietorship, so he/she is liable for any business debts. also called proprietorship.


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/sole-proprietorship/
Modern Language Association (MLA):
Sole Proprietorship. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
March 29, 2024 https://payrollheaven.com/define/sole-proprietorship/.
Chicago Manual of Style (CMS):
Sole Proprietorship. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/sole-proprietorship/ (accessed: March 29, 2024).
American Psychological Association (APA):
Sole Proprietorship. PayrollHeaven.com. Retrieved March 29, 2024
, from PayrollHeaven.com website: https://payrollheaven.com/define/sole-proprietorship/

Definition Sources


Definitions for Sole Proprietorship are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 11th August, 2022 | 0 Views.