What to Know about a Sole Proprietor

What is a Sole Proprietor?

A sole proprietorship (also referred to as a sole trader or a sole proprietor) is a type of business formation that is owned and operated by one individual. Because of this structure, the sole proprietorship possesses no legal distinction between the owner and the business itself. The owner of a sole proprietorship therefore receives all profits (subject to specific taxation) and possesses unlimited responsibility for all losses and debts incurred by the company. Every asset owned by the business is owned by the sole proprietor and every debt incurred by the business is regarded as the direct liability of the individual as well. This simply means that the owner or sole proprietor has no less liability than if the business were acting as an individual.

Although the sole proprietorship, in essence, is an individual, it may use a trade name or business name other than the legal name of the individual owner. In the majority of jurisdictions in the United States, there are strict rules regarding the permission of the true owner to utilize a business name. A requirement is typically employed to file a “doing business as” statement with local authorities. By contrast, in the United Kingdom, the sole proprietor’s name must be displayed on all stationary and media associated with the business, including on letters, business emails and at the location of the business.


Advantages of a Sole Proprietorship:

Because the sole proprietor is the chief operator and owner of the company, a sole proprietorship offers numerous advantages; chiefly the individual has the ability to raise capital, either privately or publicly and to enjoy all the profits that the business may generate. Furthermore, the individual does not have to deal with managers or other officers in deciding the best course or model for the business. In general, the disadvantages of corporations are advantages to a sole proprietorship; a sole proprietor operates with a reduced cost of business (a corporation must do a number of things to produce a product, deliver or service and limit liability), greater ease to start and discontinue work without required fees and legal expenses and an easier managerial process, due to exclusive control.


Disadvantages of a Sole Proprietorship:

Although the sole proprietor may raise capital in any way he or she deems best for the company, the ability to secure financing is far more difficult (when compared to other business formations) because an unrelated investor will be more skeptical regarding the security of his or her investment. Additionally, the sole proprietor, because of exclusive control, is far more susceptible to liability, in the form of debts and legal filings. Perhaps the largest disadvantage of a sole proprietorship is its size; the majority of sole proprietors fail as a result of limited finances. The small size of the business formation limits the breadth of management skills and production capability—fewer employees yield less specialization and production capabilities. Furthermore, the level of talent obtained by a sole proprietor will, in general, be lower for a sole proprietor—skilled workers will typically seek benefits and salaries that exceed the majority of sole proprietor’s means.