What Is Sole Proprietorship: Definition, Advantages & Disadvantages

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  • 0:07 Sole Proprietorship
  • 1:20 Forming a Sole Proprietorship
  • 2:36 Advantages of Sole…
  • 3:45 Disadvantages of Sole…
  • 5:41 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has extensive experience as a prosecutor and legal writer, and she has taught and written various law courses.

Most businesses are sole proprietorships. This is the easiest and most straightforward type of business to form. Sole proprietorships are owned and run by only one person. This lesson explains sole proprietorships.

Sole Proprietorship

Meet Monica. Monica's opening her own business! She's starting Monica's Monograms. Her monogramming business will be a sole proprietorship because it's an unincorporated business owned and run by only one person. Monica will be the only employee and will have complete control over the business.

Sole proprietorships are the most common and the most straightforward type of business structure. They aren't really considered to be business entities because there's no legal set-up. There's also no legal distinction between the owner and the business. Monica and Monica's Monograms are treated as the same entity.

This means Monica can keep all of Monica's Monograms' profits. However, Monica is also personally responsible for her business' debts and losses. The business' income counts as Monica's income so she'll be personally responsible for paying those income taxes. The business won't be taxed separately like it is in other business structures.

Forming a Sole Proprietorship

This all sounds good to Monica, but first she needs to know what to do in order to structure her business. Monica doesn't need to do anything at all in order to form a sole proprietorship. Monica's Monograms is assumed to be a sole proprietorship the moment Monica starts doing business.

There's just one item Monica will want to look into. Since Monica's business name is different than her name, she'll need to file the business name with the government. This is usually done through her Secretary of State's office, though the procedure varies from state to state.

To register her business name, Monica first needs to make sure 'Monica's Monograms' isn't already taken. Then she'll file the proper paperwork claiming the name. The forms are known as assumed name, trade name, doing business as, or DBA forms.

Monica will also need to obtain any required licenses or permits in order to legally run her business. For example, let's say Monica plans to run her business out of her home. She'll need to check with her city to be sure zoning laws don't prohibit home-based businesses.

Advantages of Sole Proprietorship

Businesses like Monica's are popular because sole proprietorships are easy and inexpensive to start. This popular business structure provides many advantages for the business owner.

Remember that there are no formal or legal requirements when starting a sole proprietorship. There are also very few legal requirements when running this type of business. This means there's typically minimal administrative expense when starting and running a sole proprietorship.

Like Monica, many business owners favor sole proprietorships because they have complete control over the business and business decisions. This allows the owner flexibility. The owner can even close the business or transfer the business to another person without obtaining permission.

Also notable, recall that the business isn't separately taxed. The business' profits belong to Monica. This is Monica's income, and she'll pay income taxes. However, there are no additional taxes involved with the running of a sole proprietorship.

Disadvantages of Sole Proprietorship

Monica thinks it will be easy to accomplish the few tasks necessary to get her sole proprietorship started. But, what are some of the disadvantages she should consider? Let's look at a few items Monica might want to think about before diving in.

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