Free Enterprise - The FindLaw Small Business Law Blog

Choosing a Business Structure: the Sole Proprietorship

To complete our National Small Business Week series on business structures, we take a look at the most common, the sole proprietorship. With a vast majority of U.S. businesses owned by one person, let's look at the reasons why, and also the reasons why some successful sole proprietorships later shift to other business structures.

According to I.R.S. data, as of 2006, there were more than 22 million non-farm sole proprietorships in the U.S. The sole proprietorship offers an ease of entry and level of control that appeals to many looking to dive into a new business or simply start a small business on the side.

So, what are the pro's and con's?

Benefits of the sole proprietorship include:

  • Ease of entry and low formation cost;
  • Far fewer legal filings. You don't need to register your business with the state, though an Employer Identification Number will be needed if you have employees, and licensing, permitting and perhaps local registration requirements will still apply;
  • Tax benefits. Taxes on profits are paid by the owner, with no federal taxes on the business separately. Here are 6 tax benefits of sole proprietorship;
  • Managerial control. A sole proprietor is the master of her domain. With no partners to cross heads and no other members or owners to chime in, the sole proprietor has full control to manage and guide the business; and
  • They are easier to sell.

Down-sides include:

  • Liability. Sole proprietors are personally liability for the debts and obligations of the business, including liability for work related acts of employees;
  • Difficulty raising capital; and
  • Limited duration. Bankruptcy or death of the proprietor generally dissolves a sole proprietorship.