What is a Sole Proprietorship?

Get Legal Help Today

 Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by

UPDATED: Jul 15, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

A sole proprietorship is you doing business as yourself, even if you use a fictitious business name. It is simple but affords no asset protection. In a sole proprietorship, anything you do in business–or an employee of yours does — is your personal liability and thus exposes all your personal assets to pay your business debts. 

Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. Examples of people who are operating as sole proprietors include freelance photographers, producers, writers, contractors, or builders that take jobs on a contract basis. Sales associates who receive only commissions or independent contractors could also be considered sole proprietors. Many entrepreneurs start out as sole proprietorships because they cannot afford the expense of setting up a partnership or corporation. Operating a business as a partnership or corporation requires filings and reporting that can be complex, which in some instances may require an attorney’s assistance. A new business with a low-cost product and low overhead may not need or be able to afford to go through the expensive process of forming a partnership or corporation.

The major disadvantage of operating as a sole proprietorship is the lack of liability protection for the owner.  In the eyes of the law, a sole proprietorship is not legally separate from the person who owns it. The fact that a sole proprietorship and its owner are one. A sole proprietor simply reports all business income or losses on his or her individual income tax return, IRS Form 1040, Schedule C.

A sole proprietor can be held personally liable for any business-related obligation. This means that if your business fails to pay a supplier, defaults on a debt, or loses a lawsuit, the creditor can legally come after your house or other possessions. Additionally, any harm found to be the fault of your business will relate to you as an individual. As with any business decision, it is important to weigh the risks of this choice against the potential benefits.

Get Legal Help Today

Find the right lawyer for your legal issue.

 Secured with SHA-256 Encryption