What Is A Sole Proprietorship

On Behalf of | May 20, 2019 | Firm News

More and more individuals are operating under sole proprietorships every year. Sole proprietorships are typically the simplest way to set up any business owned and run by one individual.

As sole proprietorships are constantly increasing in presence and popularity, it’s important that anyone considering establishing a sole proprietorship understands what it is, what the advantages are, and what the disadvantages are.

What Is Sole Proprietorship?

One of the unique aspects of sole proprietorships, when compared to partnerships, LLCs, and corporations, is that they are not considered to be legal entities. Sole proprietorships are instead owned and operated by only one individual. This individual can operate their business under their own name or under a business name. However, even if an individual chooses to give the business its own unique name, it does not make it a legal entity.

Pros of Sole Proprietorship

Sole proprietorships provide many advantages to individuals running a business. Primarily, sole proprietorships allow for incredibly low costs and ease of operations. Additionally, it is very easy to establish a sole proprietorship as all an individual needs to do is register the name of their business and obtain any necessary licenses.

Moreover, sole proprietorships save the owner from dealing with inconvenient formalities such as board meetings and votes when making important business decisions.

Cons of Sole Proprietorship

There are a few disadvantages of sole proprietorships that might influence individuals to establish their businesses as a different type of entity.

First, sole proprietorships do not provide any distinction between the individual and the company. This means that the owner is personally liable for any and all debts assumed by the company.

Furthermore, for individuals who are hoping to create a business which outlives them and that they can pass on to others, a sole proprietorship might not be the best option. As stated above, the business and the owner are considered one and the same, meaning that the business will eventually be liquidated after the passing of the individual.

Finally, if your business requires start-up capital that you don’t have, it can be difficult to raise money as a sole proprietorship. Sole proprietorships only allow for one owner and do not allow stock to be issued. As a result, it can be hard to find the funds to get a sole proprietorship up and running.

Tax Implications

One of the most beneficial aspects of sole proprietorships is the ability to combine personal and business funds. As all money generated by the sole proprietorship belongs to one individual, all business income can be considered personal income.

For taxes, this means that individuals are able to file their taxes as personal income rather than having to also complete taxes on behalf of the business. This tends to save a lot of time and money at the end of every tax year as individuals typically don’t need assistance from an accountant.

Sole proprietorships offer many benefits for individuals planning to start independently operated businesses. If you do plan on establishing a sole proprietorship, consult with an experienced attorney to make sure you understand all of the implications, legal and otherwise, of operating a sole proprietorship in Minnesota.