What is a sole proprietorship?

Before you commit to a business structure for your new business, it’s a good idea to know the answer to the question “What is a sole proprietorship?”

Many Americans dream of starting their own business.  Taking the first step, however, can be daunting.  Should you incorporate? Form an LLC? Partnership? What about the sole proprietorship?

Each structure has its own pro’s and con’s. In this post, we are going to focus only on sole proprietorships. (If you want to start at a more macro level, check out our introductory post on entity types.)

So…what is a sole prop?

A sole proprietorship (also known as a “sole prop”) is an unincorporated business that is owned by one person. Unlike corporations and LLC’s, a sole prop is not an independent legal entity.   Think of it as a default setting anytime you do business on your own. There is no requirement that it be registered or chartered by any governmental authority. The business entity is basically, you.

Sole props are not registered. They are not like corporations or LLCs. That said, you may be required to get a business license (depending on where you are doing business and the type of business). But this is no different than if your business is a corporation or LLC.

If you want to operate your California sole proprietorship in a name other than your personal name, you can apply for a doing-business-as (“DBA”) name for yourself in each county where you intend to operate your business. Without a DBA, you might not be able to receive payments payable in the name of your business’ alias name.

What are the advantages of a sole proprietorship?

• It is the easiest type of business structure to start out with, and maintain.  No state charter required for the entity.
• The owner of a sole proprietorship has complete control over the business.
• There is no minimum tax liability or yearly fee associated with the maintenance of a sole proprietorship.

What are the disadvantages of a sole proprietorship?

• There is no distinction between the owner and the business.   Thus, personal and business assets are essentially treated as one and the same. As a result, any liability of the business can be collected or levied against personal assets. In short, there is no liability protection for the business owner. 
• Sole proprietors have to pay self-employment tax.
• Sole proprietors are not paying into social security, and as such, may risk their own eligibility for social security when it comes time to retire.

Choosing the right business entity type is a very important decision. The wrong choice can be difficult and/costly to unwind later. It’s advisable to speak with an experienced professional before committing your business to a particular business structure.

Koza Law Group is a business law and estate planning law firm located in North County San Diego (Carlsbad). Feel free to call us at (760) 487-8330.