A sole proprietorship is the simplest business structure to start and maintain. With a sole proprietorship, one person owns the business and its assets, and is solely responsible for all debts and obligations of the business. In exchange, the business owner can make all decisions and is entitled to all profits.
As sole proprietor, you are considered self-employed and would generally perform all functions required to successfully establish the business including securing capital, establishing and operating business processes and paying all taxes (which are calculated and reported on your personal tax return). Since a sole proprietorship is simply an extension of the business owner (and not a separate entity), any business losses can be used to reduce other income on your personal tax return including investment income, rental income, and/or other income. On the other hand, should the business not have enough income and assets to fulfill its debt obligations, creditors would normally have access to your personal assets. This is known as unlimited liability.
Unlike many corporations, sole proprietorships tend to have more difficulty obtaining capital since it is not possible to issue shares in exchange for that capital. It may also be difficult to secure key employees as there are generally fewer resources and limitless opportunities for career advancement. However, it is typically less costly to operate a sole proprietorship as government reporting requirements tend to be less onerous than the requirement for corporations.
Sole proprietorships are generally suggested for new businesses that do not carry the threat of personal liability.
Robin Muir, CFP®, CLU®, CH.F.C.