A sole proprietorship is a simple form of business with only one owner. The owner and the business count as one legal entity.
The owner of a sole proprietorship can be called a sole proprietor, a sole trader, self-employed, freelancer, or contractor, although not all self-employed individuals, freelancers, and contractors set up a this type of business.
It’s generally quick and easy to set up this kind of business, but there are some drawbacks too.
In comparison to a limited liability company
The biggest differences between a sole proprietorship and a limited liability company are:
- Legal structure and liability: A sole proprietorship and its owner are considered one and the same legal entity. A limited liability company and its owner or owners are considered separate entities.
- Taxes: Income from a sole proprietorship is considered personal income, and you’d pay income tax, rather than corporate tax.
- Costs: It’s usually cheaper to set up a sole proprietorship rather than a limited company,
- Reporting and filing: There are fewer regulations and requirements—you don’t have to submit an annual report, and filing and paying tax is generally easier.
Pros and cons of a sole proprietorship
One of the main pros of a sole proprietorship is the lack of red tape. It’s usually quicker to get set up, and there are fewer requirements. That makes it one of the easiest ways to start a business.
You also have full control over all business decisions since you don’t have shareholders, or a board to report to.
On the other hand, since you and the business are considered one legal entity, it means you’re liable for the business’ debts—your personal assets can be sold off to cover the business’ debts—and for any lawsuits that might occur.
It’s also harder to get investors onboard in a sole proprietorship, so this business structure is better if you’re planning to keep it small and simple.