Sole Proprietor – What Is It and How Do I Become One?

Acting as a sole proprietor could be the most common form of business.  A sole proprietor is a sole business owner, he or she has no partners.  Also, since there is no distinction between the person and the entity all profits and losses are personal.  Because the entity and the owner of the company are one in the same, any liabilities incurred by the company will be the personal liabilities of the owner and the sole proprietor could be subject to unlimited liability.

Form a Sole Proprietorship

A sole proprietorship is easily formed by a sole proprietor because it requires no formalities, no filings, no operating agreements, just an intent by the sole proprietor to be in business.  A sole proprietor is a person who starts a business of any kind but does not formally create an entity within which to conduct their pursuit which is a sole proprietorship.  This means that no distinction exists between the person and the organization.  To become a sole proprietor, no formal paperwork or documentation needs to be prepared, you just start to sell your goods or services.

Name a Sole Proprietorship

A sole proprietor may choose to operate their sole proprietorship under a fictitious business name or a  trade name, which is a name other than his or her legal name. After deciding on the name under which you will conduct your operations, you may want to file your fictitious name or, more commonly called a DBA.  If you are not doing business in your own name, after you receive your official fictitious business name statement you will be able to use that to open your company’s bank accounts.

Advantages of a Sole Proprietorship

There are many advantages to a sole proprietorship, but there are many disadvantages, too.  Probably the largest advantage of a sole proprietorship is that it is easy to start up.  In addition, there are no corporate books to update and fewer regulations than most other business entities.  Another large advantage is that a sole proprietorship is easier to close than most other entity types. Of course, there are tax advantages. too, such as no need to pay corporate taxes then taxes again on the income distributed to you.

Disadvantages of a Sole Proprietorship

Of course, as there are advantages, there are disadvantages, too, some of which are discussed here.   One of the biggest concerns is that the owner of a sole proprietorship has unlimited liability and as the business grows and becomes more successful, the potential liabilities grow along with it.  Unlike forming a corporate entity or a Limited Liability Company (LLC), the sole proprietorship has no shield from liabilities.  Another potential disadvantage occurs if you are trying to obtain outside funding for your shop.

Choosing the correct business entity can be a struggle, if you need more help in finding the right entity for you in your circumstances, you should contact an attorney in your state. What business entity might be the best for your business?

If you are needing help choosing the best entity for your business,  contact us to schedule your comprehensive Business Building Benchmark today so we can identify the best course of action for you. 

Integrated General Counsel