What Is A Sole Proprietorship? - The Full Guide

What Is A Sole Proprietorship? - The Full Guide
Written by: - Phil Baker

If you are new to the business world, it can be difficult to keep track of all of the different terms and definitions that relate to your business. One of these terms is sole proprietorship. We are going to be diving into this particular term to not only define it but also get a firm grasp on the subject, as well as some pros and cons of the business structure. Let's get started.

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What Is Sole Proprietorship?

A sole proprietorship is a business in which there is just one owner or operator. This means that the person who owns the company has full responsibility for everything related to the operation of the business. 

The owner will have complete control over how the company operates and what decisions are made regarding the business. They will be responsible for making sure that the company follows all legal requirements and that the financial aspects of the company run smoothly. In addition, the owner will be personally liable for any debts incurred by the company. 

Also read: How To Trademark A Name

 

How Does A Sole Proprietorship Work?

In order for a sole proprietorship to operate, the owner must file a simple document with the state called an “Articles of Incorporation”. This document states that the corporation was formed and provides information about the name of the company, the type of organization (sole proprietorship), the date of incorporation, the location where the company is incorporated, and other important details. 

Once the Articles of Incorporation have been filed, the owner will then need to register their business under the laws of the state in which they reside. After this step has been completed, the owner will be able to legally conduct business under the name of the company.

Also read: What Is An Llc And What Does It Mean?

 

The Difference Between LLC And A Sole Proprietorship

There are many similarities between a sole proprietorship and a limited liability company. Both companies are considered separate entities from the owners themselves. However, there are some differences between the two types of businesses. 

A sole proprietorship does not require a board of directors or shareholders. It is owned by one individual and operated by them alone. On the other hand, a limited liability company requires at least one member. This member is referred to as the “member manager”. The member manager is required to sign all documents associated with the company as well as to manage the day-to-day operations of the company.

Also read: Paystub Records: What Are The Legal Requirements?

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Pros & Cons Of Sole Proprietorship

Let's now take a closer look at some of the pros and cons of a sole proprietorship.

Pros:

  • Low Cost - One of the biggest benefits of operating a sole proprietorship is that it is very cost-effective. There are no outside investors or partners involved so the initial costs associated with starting up a company are minimal. Additionally, since the owner does not have to pay taxes, he or she will save money every year.

  • No Taxes -Another benefit of being a sole proprietor is that there are no taxes to pay. Since the owner pays income tax on his/her personal earnings, there is no reason to pay taxes on the profits made by the business. However, if you want to deduct expenses from your taxable income, you can do so as long as those expenses are directly related to the business.

  • Easy To Start And Operate - The last advantage of operating a sole proprietorship is that it is easy to start and operate. All that needs to be done is fill out a few forms and register the company with the state. From there, all the owner has to worry about is making sure that everything runs smoothly.

  • Easier To Sell The Business - If the owner decides to sell the business, it will be much easier than selling shares in a corporation. With a sole proprietorship, the only thing that needs to happen is to transfer ownership of the assets to another person. In contrast, when selling shares in a corporation, the buyer must also purchase the stock which can get expensive.

Cons:

  • Limited Liability - One of the main disadvantages of running a sole proprietorship is the limited liability that comes with it. As stated earlier, the owner is personally liable for any debts that the company incurs. This means that if anything goes wrong with the business, the owner could end up having to pay out of pocket for any losses.

  • Personal Responsibility -  As mentioned above, the owner of a sole proprietorship is fully responsible for the actions taken by the company. If something goes wrong, the owner could face serious consequences such as losing his or her home or even going to jail.

  • High Maintenance - The downside of operating a sole proprietary business is that it requires a lot of maintenance. Since the owner is responsible for everything that happens within the company, he or she will need to make sure that all aspects of the business run properly. Any issues that arise will need to be fixed immediately.

  • Difficult To Expand - If the sole proprietorship grows too large, it becomes difficult to manage. It may become necessary to hire additional employees who will require their own set of benefits. Also, the owner will need to keep track of each employee’s hours and ensure that they are paid correctly.

Also read: Here Are The Best Countries To Start A Business In 2019

 

Is A Sole Proprietorship Right For You?

Before deciding whether a sole proprietorship is right for you, consider what kind of business you plan to create. Are you looking to start a small business that does not involve many risks or responsibilities? Or are you interested in starting a larger business where you will have more control over how things work? Once you know what type of business you want to start, you should be able to determine whether a sole proprietorship makes sense for you.

Also read: Can Employees Access Their Pay Records?

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Final Thoughts

A sole proprietorship is an ideal way to start a new business. While this type of business comes with its drawbacks, it offers several advantages including low start-up costs, less paperwork, and fewer liabilities. If you want to open up a business as an entirely solo venture, then a sole proprietorship might be the best option for you.

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