What Are The Characteristics of Sole Proprietorship?

A sole proprietorship is a business structure that requires no formal paperwork to set up. Is owned by one person and has limited tax benefits. Legally there is no separation between the business and its owner making the owner responsible for liabilities the business incurs. 

Key Points:

• Take your time: If your business is small and requiring financing is not yet on the horizon a sole proprietorship might be the way to go.
• Take professional advice: It really is the best way to know what is right for you.

Characteristics of Sole Proprietorship

Single Ownership

One of the main characteristics of a sole proprietor operation is that it’s a one-person business.

• Only one owner: A sole proprietorship can only have one owner. 
• Want to have multiple owners? You’ll need to consider a different business structure such as a partnership, LLC, or corporation. See sole proprietorship vs llc for further information. 

Controlled by One Person

As a sole proprietor, the owner is completely in charge.

• One controlling party: The owner of the sole proprietorship is the controlling party. 
• No one else can make decisions for the business: The sole proprietor has the freedom to make choices for the business as they see fit. You won’t find a board or separate manager making decisions for a sole proprietorship. 
• Risks: as the sole decision maker, if anything happens to you the business will close at your death or disability. 

No Legal Entity

A sole proprietorship doesn’t require any paperwork to get started.

• No separate legal entity: In the eyes of the law, the business owner and the sole proprietorship are the same. 
• One tax filing: You won’t have to file a separate tax return for your sole proprietorship. Instead, you’ll include the business profits and losses on your personal tax returns. 

Unlimited Liability

Without a separate legal entity involved, the business owner faces unlimited liability with a sole proprietorship.

• Unlimited liability: The business owner is personally responsible for all debt obligations and lawsuits facing the business. 
• Example: If your sole proprietorship takes out a debt that it cannot repay, you’ll be personally responsible for repaying the funds from your own pocket. 

No Profit-Sharing

With all the risk comes all of the rewards.

• No profit-sharing: The business owner is entitled to all of the business income. As a sole proprietor, you can claim all of the profits and losses from your business. 
• Employees cannot share the profits: If you hire employees, you cannot provide a profit-sharing incentive. 

Small in Size

Generally, sole proprietorships are small operations.

• Limited funding: Sole proprietorships often struggle to obtain outside capital. With limited funding options, many keep their operations small. 
• Liabilities: As a business grows, it takes on more risk. Most sole proprietorships intentionally keep their business small to limit liabilities. 
• Other business structures are better suited for large businesses: Many sole proprietorships transition into another business structure when they grow. A few popular structures include partnerships, LLCs, and corporations. 

Lack of Legal Formalities

The paperwork requirements of a sole proprietorship are very minimal.

• No need to file paperwork to get started: You are considered a sole proprietorship as soon as you begin business activities. 
• No ongoing paperwork requirements: You won’t need to file updates about your business with your state government. That’s a sharp contrast to other business structures. 
• Easy to dissolve: You can immediately dissolve a sole proprietorship without any paperwork involved. It simply requires a stop of all business operations. 

Advantages of a Sole Proprietorship

When considering the characteristics of sole proprietorships, there are many advantages to consider. The following benefits are especially enticing.

Easy Startup

So, what is the main advantage of a sole proprietorship? Generally, business owners point to the ease of setting one up. 

• No paperwork: You don’t need to file any paperwork to get your business open. Instead, you just need to start your sole proprietorship activities. 
• No cost: Without the need to file paperwork, you’ll avoid the filing fees that can add up for LLC and corporation owners. 

Simplified Business Structure

A sole proprietorship is a lesson in the simplicity of business.

• One person in charge: As a sole proprietor, you are completely in control of your business decisions. 
• No board members or partners to answer to: You won’t have to conduct a meeting to gather the input of other business owners. Instead, sole proprietors can make decisions as they see fit. Many sole proprietors have advisors for guidance, but they are informal and have no legal authority nor obligation to the sole proprietorship. 

Direct Motivation

As the business grows, you receive all of the rewards:

• Profits go to your pockets: As the sole proprietor, you’ll get to claim all of the profits at the end of the year. That’s a great motivation to grow your business. 
• No need to share with other owners: Unlike other business structures with multiple owners, you won’t have to split up your business earnings. 

Better Control Over Operations

Complete control over the business operations. 

• Quick decisions: As a sole proprietor, you can make quick decisions about the future of your business. 
• Operational control: With just one person in charge, you can create an operations plan that meets your business needs. 

Simplified Taxes

Tax time is not a headache with a sole proprietorship.

• No EIN required: Although you can get an EIN from the IRS, it’s not required. 
• Only one tax return: As a sole proprietor, you’ll claim your business profits and losses through a Schedule C attached to your personal tax return. With that, you won’t have to file separately to report your business expenses. Check out sole proprietorship taxes for an in-depth look at this topic. 

Straightforward Banking

Sole proprietorships don’t need to open an extra bank account.

• Don’t need to separate business expenses: As a sole proprietor, you aren’t required to keep business and personal finances separate. With that, you don’t need to create a second bank account. 
• But you still have the option: Although sole proprietorships aren’t required to get a separate business bank account, it’s usually a good idea. It helps you track your business income and expenses more easily. 

Fewer Business Fees

Sole proprietorships are able to save on business fees.

• No startup filing fee: As a sole proprietorship, you can avoid any filing requirements. And therefore, avoid the attached fees. 
• No annual filing fee: Sole proprietorships don’t have an annual filing requirement or an annual filing fee. 

Disadvantages of a Sole Proprietorship

Of course, every business structure comes with some disadvantages. Here’s what to consider with a sole proprietorship. 

No Liability Protection

The biggest disadvantage associated with a sole proprietorship is the lack of liability protection.

• No legal distinction: You are held personally responsible for business debts and lawsuits without a legal separation between your business and your personal assets.
• Personal assets at risk: The fact that creditors can seize your personal assets for business debts is a big risk.

Less Access to Capital

It’s generally more difficult for sole proprietors to obtain outside funding.

• Lenders: Many lenders may not be willing to provide a business loan to a sole proprietorship because the line between personal and business pursuits is blurry. 
• Investors: Most investors are wary of investing in a sole proprietorship because there is no legal distinction between the owner’s and the business’s assets. 
  It’s more difficult for sole proprietors to get financing; explain why. 

Limited Size

Full control comes with limitations.

• One person in charge: A single sole proprietor can only do so much. Typically, this business structure limits growth due to the owner's time constraints. 
• Liability concerns: A sole proprietorship can hire employees. But many shy away from this due to the liability issues. 

Potential Lack of Experience

Everything comes down to the sole proprietor.

• Multiple hats required: Most sole proprietors have to cover multiple job duties. It’s possible to cover a job duty you aren’t comfortable with. 
• Limited time to learn new skills: When you are in charge of an entire business operation, you might not make time to learn new skills. 

Reduced Marketability

It’s difficult to sell a sole proprietorship.

• Blurred lines: The lack of distinction between personal assets and business assets makes it difficult to sell a sole proprietorship. 
• Credibility concerns: Some customers prefer to work with LLCs or corporations. 

Lack of Continuity

When one person is in charge, it can be difficult to transition the business to a new owner.

• Unique choices: When a sole proprietor decides to leave the business, that might be the end of it. Without their unique way of operating the business, most customers will see a lack of continuity if someone else tries to take it over. 

Examples of a Sole Proprietorship

You can find sole proprietorships in many industries and professions. Here are a few examples of businesses that work well as sole proprietorships:

• Freelance graphic design
• Freelance writing
• Small local store
• Online store
• Author
• Artist
• Photographer

Of course, this is not a complete list. But if you are considering a sole proprietorship, these are a few ideas to get you started.

FAQs about Sole Proprietorship and Its Characteristics

Still have questions about the characteristics of a sole proprietorship? Here are the answers you