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Sole proprietorship


Sole proprietorship

A sole proprietorship, also known as the sole trader, individual entrepreneurship or proprietorship, is a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole trader does not necessarily work 'alone'—it is possible for the sole trader to employ other people.

The sole trader receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's. It is a "sole" proprietorship in contrast with partnerships (which have at least two owners).

A sole proprietor may use a trade name or business name other than their or its legal name. They may have to legally trademark their business name if it differs from their own legal name, the process varying depending upon country of residence.

Understanding Sole Proprietorship

A sole proprietorship is very different from corporations and limited partnerships, in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business's owner.

One of the main benefits of the sole proprietorship is the pass-through tax advantage, mentioned previously. The disadvantage of a sole proprietorship is in getting capital funding, specifically through established channels, such as issuing equity and obtaining bank loans or lines of credit. It begins as an entity with unlimited liability. As a business grows, it often transitions to a limited liability company (LLC) or an S-corporation.

Example of Sole Proprietorship

Most small businesses start as sole proprietorships but end up evolving into different legal structures as time passes and the company grows. For example, in 2005, Kate Schade started her company, Kate's Real Food, as a sole proprietor. The company creates and sells energy bars, and it began as a local vendor in Schade's hometown of Victor, Idaho. The sole proprietorship sold its energy bars at local farmers markets and then expanded to sell online and to a few accounts in Jackson, Idaho.

Since 2005, Kate's Real Food has grown to supply accounts across the country. She restructured the business from a sole proprietorship to a corporation to take on investments and expand, which is a natural step for a growing business.

Special Considerations

Usually, when a sole proprietor seeks to incorporate a business, the owner restructures it into an LLC. In order for this to work, the owner must first determine that the name of the company is available. If the desired name is free, articles of organization must be filed with the state office where the business will be based.

After the paperwork is filed, the business owner must create an LLC operating agreement, which specifies the business structure. Finally, an employer identification number (EIN), similar to a Social Security number for businesses, needs to be obtained from the Internal Revenue Service (IRS).

 


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