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A sole proprietorship is the simplest form a business can take. Most small businesses start out as sole proprietorships and often morph into a partnership, LLC, or corporation. A sole proprietorship, much as the name indicates, will only have a single owner. One immediate advantage of a sole proprietorship is that other than the various local and state business licenses that every business must purchase there are no legal hoops to jump through to begin a business. This makes it much easier than a corporation, and S-Corporation or even an LLC that require a special filing with the state's Secretary of State.

Another advantage is that the owner of a sole proprietorship gets to retain all profits from the operation and may share any portion of the profits and losses with another person or persons. The owner also gets to make all the decisions relating to the business since there are no other owners or any board of directors.

Finally the owner may hire employees or work with consultants but will retain the sole proprietorship. It should be noted, however, that to hire employees there will need to be some additional filings to get employer ID numbers on both the federal and perhaps the state level. A federal tax ID can be acquired easily on-line at www.irs.gov.

Unfortunately there are some disadvantages to operating your business as a sole proprietorship, the most glaring being unlimited liability. An owner of a sole proprietorship is personally liable for all business debts taken on by the organization. This may even include the sacrificing of personal assets to pay off any liabilities.
Also the owners of a sole proprietorship may incur severe potential liabilities from customers, competitors, lenders, employees, and even the government. If the cost of liability insurance or defending against a lawsuit is beyond the financial capability of the business, then the owner could potentially lose everything they personally own in satisfying the liability. This is the reason many individuals holding extensive personal assets may not want to use a sole proprietorship to create a business.

As a final note I should add that a sole proprietorship terminates immediately if the owner dies. A spouse, friend or some other relative may continue the business operating under the same name, but legally a new business ( assumed a sole proprietorship) has been formed. A sole proprietorship also terminates if the ownership interest is sold or if the business is abandoned by the owner.

Learn more about this author, Ed Hensley.
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