A sole proprietorship is the very definition of going into business for yourself. You are the business and the business is you. And there’s nobody else.
Perhaps the most common form of business organization for startups, a sole proprietorship can be terrific and terrifying. The credit and the blame; the profit and the loss; the freedom and the responsibility; all of it is all yours – all the time.
The upside: It’s simple. It doesn’t cost much to set up and it’s easy to dissolve. The big downside is you’re personally liable for business debts. There are a handful of factors to consider when deciding whether a sole proprietorship is best organizing structure for your business. Let’s touch on a few of the biggies.
Complexity and Expense
The sole proprietorship is the simplest form of organization and the least expensive to start. Basically, you just go into business. That alone establishes you as a sole proprietorship. Of course, owners still need to obtain the appropriate business licenses and permits, tax identification numbers, and may need to register the business name.
Many people start their business as a sole proprietorship and change the structure later on as the business expands or takes on other owners.
You are personally liable for the debts of the business, even if those debts that exceed your investment in the business. All your assets – both those used in the business and personal property – can be sold to pay business debts.
Distribution of Profits and Losses
You receive all the profits from the business – and bear all the losses, which may exceed your investment.
Management Control and Decision Making
With no partners or shareholders to consult or satisfy, you have full and complete authority to manage the business, which is great for anyone who wants to call all the shots. It makes it tough to leave the business for any extended period, though, since you’re the only person authorized to make decisions.
Financing Startup and Operation
You’re ability to raise capital is generally limited to the amount you can personally secure, meaning sole proprietorships usually have less money available to finance operations or expand.
Transferability of Ownership Interest
Pretty simple here. You transfer ownership of the business by transferring the assets to the new owner.
Sole proprietorships, as a form of business organization, are generally not regulated by the state. Other than tax filings and specialized reports applicable to certain kinds of businesses, no special governmental filings or reports are required, making the sole proprietorship the least restrictive, most private form of business organization.
While there are several tax-related factors to weigh, (rates, impact, capital gains, payroll taxes, etc.), a primary consideration is how income and expenses are reported. In a sole proprietorship, income and expenses are reported on the owner’s individual income tax return, and profits are taxed at the individual tax rate.
Consultants at our Small Business Assistance Office can help you understand sole proprietorships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.