Sole Proprietorship: The Least Complicated Business Type

Perhaps the least complex among all kinds of business organizations when it comes to business formation and structure is the sole proprietorship type of organization.

Sole proprietorship is a kind of entity which has no legal separation from its owner. A person who wants to create a business can do so without the need of another person to help him in capitalizing a business entity. That makes it distinct from partnership and corporation which can have more than one owner. The management, operation and all other functions may have to be executed by a sole proprietor unless he hires someone to help him in one or two of the business functions.

A person operating a sole proprietorship has the option to use a business name or trade name. The registration of a trade name allows the sole proprietor to market his product or service aside from his name. Most sole proprietorship businesses do that for legitimacy purpose.

Although a sole proprietorship can be formed legally, it is not heavily regulated by the government in its jurisdiction than other types of business entity. A sole proprietor has the discretion over his enterprise. He can have the overall decision in what to do with his enterprise. He can decide when to operate, how to manage and what to purchase and acquire. He can opt when to start and to cease.

The discretion to own and operate an enterprise is an advantage inherent in a sole proprietorship business form. Aside from that, a sole proprietor can have the pleasure to acquire all the proceeds and profits of his enterprise. This can be a way for a single person to build wealth. A sole business owner can desire to increase his standard of living out from the income and profits of his enterprise.

When it comes to taxation, the income of a sole proprietorship business and of the business owner is treated as one. A sole proprietor may only have to file one income tax return which includes the income of his business enterprise. In many jurisdictions particularly in the United States, a sole proprietorship would report its income as well as deductions on a personal income tax return. The taxation treatment of a sole proprietorship is different from a corporation wherein the business owner would have to deal with double taxation. Aside from the taxation of the business enterprise he owns or has a share with, a business owner may have to file another income tax return to report his personal income.

A business owner can practice his entrepreneurial talents without the control and discriminating influence from other parties. The simplicity of formation and structure of a sole proprietorship is a kind of advantage.

However, when a business enterprise of a sole proprietorship form starts to grow, greater risk starts to kick in. The risk of operating and managing is shouldered by one person. That makes it a disadvantage to form a sole proprietorship. A sole business owner may have all the headaches in operating a business enterprise.

Moreover, a sole business owner may have the difficulty to raise capital enough to operate a business. The shares of a sole proprietorship business form cannot be sold. Venture capitalists cannot pour in investment to this kind of business entity unless it changes into a limited liability company. Its sense of business legitimacy is smaller compared to a limited liability company or corporation.

Furthermore, sole proprietorship has a general liability. The sole business owner cannot be protected from the claims of creditors when it comes to insolvency and bankruptcy. What is liable in a business may be extended to the personal assets of the sole proprietor.

The uncertainty of a sole proprietorship business can also be a disadvantage. The type of business entity can cease whenever the owner decides to quit or during his death. It is also a probable reason hiring of employees can be difficult.

To reduce the risks that can come in a sole proprietorship, a sole proprietor can opt to form a limited liability company. The tax treatment of the latter business form may be similar to sole proprietorship.