What Is a Sole Proprietorship?

The Most Common Form of Small Business Ownership


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.

Unlike an incorporated business or a partnership there is no legal distinction between the business and the owner in a sole proprietorship - the business is considered to be an extension of the owner.

Advantages of a Sole Proprietorship

  • Business losses can be deducted against other forms of income or carried forward or backward, so a sole proprietorship that loses money in the early years can deduct the losses against personal income, making it ideal for those wishing to transition from employee to self-employed over a period of time.

    Disadvantages of a Sole Proprietorship

    • Since there is no legal separation between you and the business, as a sole proprietor you are personally responsible for all the liabilities and obligations your business incurs.This means that as a sole proprietor if the business fails 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 liability. 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. Having sufficient business insurance is very important for sole proprietorships as it is with other forms of business.
    • 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?)
    • Some businesses, government agencies, consulting groups, etc. will not deal with unincorporated businesses.
    • Raising capital is more difficult for sole proprietorships - incorporated companies can raise equity financing from angel investors or venture capitalists by selling shares in the business.
    • Sole proprietorships can be difficult to sell as the business is completely tied to the owner -  since there is no distinction between the assets of the owner and the assets of the business proper valuation of the business can be hard to achieve. Death or long term illness of the owner can render the business worthless. Customer loyalty resides with the original owner of the business and may not readily transfer to a new owner.

    It should also 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 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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