What Is a Sole Proprietorship?

The Sole Proprietorship Is Most Common Form of Small Business Ownership

A Sole Proprietorship.

Definition:

A sole proprietorship is a unincorporated business owned by one individual, making it the simplest form of business to start and operate. There are over 20 million sole proprietorships operating in the United States and Canada, making it by far the most popular form of business ownership.

The key feature of the sole proprietorship definition is that unlike an incorporated business or a partnership there is no legal separation between the business and the owner in a sole proprietorship - the business is considered to be an extension of the owner and as such the owner is personally responsible for any debts or liabilities incurred by the business.

 

Advantages of a Sole Proprietorship

    Disadvantages of a Sole Proprietorship

    • As mentioned above, with a sole proprietorship there is no legal separation between you and the business. This means that as a sole proprietor if the business fails and incurs debts or if you are sued for damages caused by accident or negligence in the course of your business activities, your personal assets (including your home and any other assets registered in your name) could be seized to discharge the liabilities. With an incorporated business or partnership the personal assets of the owner(s) are separate from the assets of the business and as such are protected from seizure for debt obligations or liability. As with all forms of business, having sufficient business insurance is very important.
    • While tax simplicity can be an advantage for sole proprietorships, it can also be a disadvantage in terms of flexibility, as all business income must be reported as regular income in the year in which it was earned. Incorporated companies have much more flexibility in terms of how and when the owners are paid. (See Salary or Dividends - How Do I Pay Myself?)

    A Good Starting Point?

    It should be noted that you don't have to keep the same form of business ownership for the life of a business. Many small businesses start out as sole proprietorships, for example, and then become corporations later on (see Incorporating a business in the U.S. or How to Incorporate in Canada).

    Examples: The sole proprietorship is the most common form of business in Canada and the United States.

    See also:

    Choosing a Form of Business Ownership

    Should You Incorporate Your Small Business?

    Thinking of Starting a Small Business?

    Top 10 Tips for Starting a Business

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