Sole Proprietorship

Loading the player...

What is a 'Sole Proprietorship'

A sole proprietorship is an unincorporated business with one owner who pays personal income tax on profits from the business. With little government regulation, they are the simplest business to set up or take apart, making them popular among individual self contractors or business owners.

Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.

Sole proprietorship is also known as "proprietorship".

BREAKING DOWN 'Sole Proprietorship'

There is no separate legal entity created by a sole proprietorship, unlike corporations and limited partnerships. Consequently, the sole proprietor is not safe from liabilities incurred by the entity. The debts of the sole proprietorship are also the debts of the owner. However, all profits flow directly to the owner of a sole proprietorship.

The benefit of the sole proprietorship is the tax advantage. The disadvantage of a sole proprietorship is obtaining capital funding, specifically through established channels, such as equity (selling shares) and obtaining bank loans or lines of credit. As a business grows it often transitions to a limited liability company (LLC) or S corporation.

To learn about the tax implications of being a sole proprietor, check out Who is required to fill out a Schedule C IRS form?

RELATED TERMS
  1. Buy And Sell Agreement

    An approach used by sole proprietorships, partnerships and closed ...
  2. Firm

    A firm is a business organization, such as a corporation, limited ...
  3. Independent 401(k)

    A 401(k) plan set up for an individual running a sole proprietorship ...
  4. Unlimited Liability

    A type of business where owners share joint and several responsibility ...
  5. Business Guarantee

    A credit card agreement in which any debts accrued on a corporate ...
  6. Self-Employed

    A situation in which an individual works for himself or herself ...
Related Articles
  1. Entrepreneurship & Small Business

    What's a Sole Proprietorship?

    A sole proprietorship is an unincorporated business that has one owner who pays the taxes on the profits of that business.
  2. Entrepreneurship & Small Business

    Starting A Small Business: Business Structures

    By Amy Fontinelle When you start your business, you have several options for structuring it that will affect your income tax situation and your potential liability if something goes wrong.Sole ...
  3. Personal Finance

    Taxes in Texas for Small Business: The Basics

    Learn the tax implications for small businesses in Texas, and discover how different types of small businesses, such as LLCs and S Corporations, are taxed.
  4. Entrepreneurship & Small Business

    Business Startup Costs: It's In The Details

    Don't overlook the details when starting up a business. It's the small expenses that have the potential to make or break a great idea.
  5. Personal Finance

    S Corp. Vs. LLC: Which Should I Choose?

    Understand the major distinctions between an S corporation and an LLC, and the important factors to consider when choosing your business structure.
  6. Personal Finance

    Taxes in Oregon for Small Business: The Basics

    Learn the tax laws for small businesses in Oregon, and understand the different types of taxes small business owners face based on business type.
  7. Managing Wealth

    Don't Get Sued: 5 Tips To Protect Your Small Business

    Find out what you can do to limit risk and keep your business running smoothly.
  8. Entrepreneurship & Small Business

    Top Legal Tips for Starting a Business

    Before you launch a new business, make sure you're on top of the key issues that most startups face.
  9. Retirement

    Using Insurance in a Business Succession Plan

    How to use life and disability insurance to help fund a business succession or buyout plan.
  10. Financial Advisor

    Laws & Regulations To Know Before Changing the Name of Your Business

    Discover some of the most important steps you need to take after making a decision to change your legally established business name.
RELATED FAQS
  1. If you have a house that is under your company name and you want to sell it back ...

    The answer to this question really depends on the type of legal entity your business is operated through. Businesses may ... Read Answer >>
  2. What are some of the features and benefits of SEP IRAs and Roth IRAs?

    SEP IRA Established and funded by a business (including a sole proprietorship) Must be established and funded by the employer's ... Read Answer >>
  3. Can I file 1040 business taxes for a small business, separately from my individual ...

    I have already filed my individual income taxes and received my refund. My husband has a towing busine... Read Answer >>
  4. Can I invest my IRA in an entity, business or LLC?

    Explore different types of businesses, entities, corporations and limited liability companies, and the types IRA-eligible ... Read Answer >>
  5. Who's required to fill out a Schedule C IRS form?

    Find out if you're required to use a IRS Schedule C form when completing your tax return this year. Read Answer >>
  6. I am starting a limited liability company (LLC). I will be the sole member. Can I ...

Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center