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Sole Proprietorship

What is a Sole Proprietorship?

A sole proprietorship (also known as individual entrepreneurship, sole trader, and proprietorship) is a type of an unincorporated entity that is owned by one individual only. It is the simplest form of a business entity.

 

Sole Proprietorship

 

Note that unlike the partnerships or corporations, a sole proprietorship does not create a separate legal entity from the owner. In other words, the identity of the owner or the sole proprietor coincides with the business entity. Due to this reason, the owner of the entity is fully liable for all the liabilities incurred by the business.

The simplicity of a sole proprietorship makes such a form of business entity extremely popular among small businesses and self-contractors. Note that, sometimes, it can be transferred into another form of business entity.

 

Advantages of a Sole Proprietorship

Despite its simplicity, a sole proprietorship offers several advantages, including:

 

1. Easy and inexpensive process

The establishment of a sole proprietorship is generally an easy and inexpensive process. Certainly, the process varies depending on the country, state, or province of residence. However, in all cases, the process requires minimum or no fees, as well as very few paperwork.

 

2. Few government regulations

Sole proprietorships adhere to a few regulatory requirements. Unlike corporations, the entities do not need to spend time and resources on various government requirements such as financial information reporting to the general public.

 

3. Tax advantage

Unlike the shareholders of corporations, the owner of a sole proprietorship is taxed only once. The sole proprietor pays only the personal income tax on the profits earned by the entity.

 

Disadvantages of a Sole Proprietorship

Despite the advantages of proprietorships, they still come with a few disadvantages. They include the following:

 

1. Unlimited liability of the owner

Since a sole proprietorship does not create a separate legal entity, the business owner faces unlimited personal liability for all debts incurred by the entity. In other words, if a business cannot meet its financial obligations, the entity’s owner must use his or her personal assets to repay the debts.

 

2. Limitations on capital raising

Unlike partnerships and corporations, sole proprietorships generally enjoy fewer options to raise capital. For example, the owner cannot sell the equity stake to obtain new funds. In addition, the ability to obtain the loans depends on the owner’s personal credit history.

 

Additional Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Corporate Structure
  • General Partnership
  • Limited Liability Company (LLC)
  • Real Estate Joint Venture

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