What is a Sole Proprietorship? Examples and Pros & Cons

Sole proprietorship is a bit of a mouthful, and more than a little confusing to spell. 

You may have heard the term thrown around by business owners or entrepreneurs, but what exactly does it mean? “Who is a sole proprietor?”, you may be wondering. Could you be a sole proprietor? Should you? 

In this article, we’ll discuss: 

• What sole proprietorship means 
• Real-world examples of sole proprietorship 
• Pros and cons of sole proprietorship 
• Sole proprietorship vs. LLC structuring. 

Let’s get into it!

Key Takeaways

• Sole proprietors are business owners who run an unincorporated business.
• Sole proprietors pay personal tax on their business earnings.
• Sole proprietorship requires very little legal paperwork — just a license or a permit depending on your location and type of business.
• A sole proprietorship arrangement does not separate personal and business assets, so you don’t have any limited liability protection.
• Sole proprietors can claim business expenses on their tax returns for necessary equipment and running costs.

What is Sole Proprietorship?

A sole proprietorship exists when a small business is run by only one owner who pays personal income tax on the business’s earnings. 

This might seem a little confusing; after all, don’t all businesses have an owner?

When a business is incorporated, its owners are the collection of shareholders who each own a stake in the business.

An unincorporated business with only one owner is a sole proprietorship, hence the “sole” in the title.

A sole proprietorship is a path many startup founders, entrepreneurs, or contractors take when they set their business up as a small or local enterprise and want to establish or develop a brand for themselves while retaining complete control.

Related reading: How to start a sole proprietorship

Sole Proprietorship Examples

You can find examples of sole proprietorship all over the world, and you’ve probably engaged the services of one in your day-to-day life.

Your local bakery might be a sole proprietorship where the head baker owns and runs the store. 

They take business revenue as their own and pay their lease, taxes, and operating costs from it. 

Sole proprietors might and often do have employees. So, even if there are other bakers working at your local bakery, if the bakery is unincorporated and the owner is the sole owner, then it is a sole proprietorship.

Importantly, the sole proprietor of your local bakery doesn’t actually have to be in the back room kneading dough or rolling pastry. 

Sole proprietors can have employees who do the work, as long as the sole proprietor is the one who files payroll tax and pays for the relevant running costs.

Another type of sole proprietor might be a freelance graphic designer. They operate their own business, but instead of maintaining fixed premises, they might work from home or rent a co-working space.

A sole proprietor like our graphic designer might engage with different businesses on a contract-to-contract basis, doing a variety of work.

In both scenarios, the owner of the business is a single owner who pays personal tax on their business revenue, can claim expenses, and is legally inseparable from the business.

Sole Proprietor: Advantages & Disadvantages

In the table below, you will find the different advantages and disadvantages of being a sole proprietor.

Advantages	Disadvantages
Ownership and control of the business are one and the same	Responsibility to creditors is the sole proprietor’s total responsibility
Limited paperwork	No limited liability protection, business assets, and personal assets are the same
After-tax and after-expense profits are retained by the sole proprietor	Can be more difficult to raise capital without shareholders
Flexibility in closing the business or setting up a new one	Eventually have to become incorporated when your business grows

Sole Proprietorship vs. LLC

So, if some businesses are sole proprietorships, what about LLCs? 

Limited liability companies or corporations differ from sole proprietorships in some pretty significant ways. 

An LLC or corporation is a legal entity unto itself, meaning that it exists independently of its owners or operators. 

That isn’t to say that it has no owners — far from it — but it does mean that the business itself is treated as legally distinct from those owners. 

On the subject of owners: where a sole proprietorship has only one complete owner, corporations and LLCs can have many owners or shareholders. 

Shareholders each own a percentage stake in a corporation and so have control over it, and an LLC is a business with multiple direct owners. 

Sole Proprietors, as we’ve covered, are single owners of a business that is not separate legally from them.

When considering whether or not your business would be better suited to being an LLC or a sole proprietorship, one of the key things to consider is scale and paperwork.

While a bank loan and/or your own savings can be enough to set up a sole proprietorship, a corporation is generally the path taken by businesses that intend to scale up. 

Often, if a sole proprietorship begins trading at a greater rate and garners enough attention, the owner may seek out partners and investors to transition the enterprise into an LLC with a fixed management structure and corporate bylaws.

Another feature that separates sole proprietors from corporations is the registration process and associated paperwork. 

Registering an LLC requires a lot of legal documentation and articles of incorporation, whereas the process of registering a sole proprietorship business is much less onerous.

How to Create a Sole Proprietorship

Setting up your own sole proprietorship is really rather simple! All you really need to do are these three steps:

1. You need to obtain the appropriate licenses and permits, which will depend on the type of work your business undertakes and the location you are operating. Permits might include licenses for preparing and serving food, or the ability to operate in public spaces.
2. You will need to register the name of your business, referred to as a “DBA” or “Doing Business As” name.
3. You will need to apply for an Employer Identification Number from the IRS.

To fast-track this process, you can engage a business formation service like ZenBusiness operating in your area.

Next Steps

As you can see, a sole proprietorship isn’t as complex as it may have at first seemed. 

Prepared with this information, you should now be able to decide if a sole proprietorship is right for you and your business.

FAQs

Related reading:

• Sole proprietorship vs. S Corp
• Sole proprietorship vs. partnership