Article Summary

  • A sole proprietorship is a type of business structure indicating it is owned and operated by one individual.
  • You may not have to complete any paperwork to start a sole proprietorship, except in some states that require a business license.
  • With a sole proprietorship, you report your business income and expense deductions on your personal income tax return, rather than filing a separate business tax return.
  • The most significant drawback for many is that sole proprietorships have unlimited personal liability, meaning your personal assets may be at risk if you need to cover business debts or damages.

Starting a business can be a thrilling venture, but the complexities of ownership may eventually become overwhelming. From developing a business plan to finding customers, the to-do list for launching a business can be endless, and details like your company’s structure might be easily overlooked. That’s why many fledgling owners decide to take the straightforward route of establishing their business as a sole proprietorship.

But what exactly does it mean to be a sole proprietor, and what are the advantages and disadvantages of this business structure? Here’s what to know to help you decide if sole proprietorship is the right path for your entrepreneurial journey.

What is a Sole Proprietorship?

A sole proprietorship is precisely what it sounds like: a business owned and operated by one individual. According to the U.S. Small Business Association, nearly 87% of firms without employees are sole proprietorships.[1]

Establishing a Sole Proprietorship

Starting one couldn’t be easier—simply begin conducting business and you’re off the ground. No formal paperwork is needed, unless your state requires a business license or permit. There are handy guides that help summarize the needs for each state.[2]

Advantages of a Sole Proprietorship

There are several reasons sole proprietorships are an attractive option for many entrepreneurs. Perhaps most appealing is the ability to maintain complete creative control and autonomy in bringing your unique vision to life.

The simplicity of setup and minimal paperwork requirements can make it easy to establish, and you may not have any start-up costs depending on your venture.

You'll also enjoy “pass-through taxation,” which means your business income is only taxed at the personal level, avoiding corporate income tax.[3] When tax season arrives, you'll report your business income and expense deductions on your personal income tax return, rather than filing a separate business tax return.

The IRS website has more information on which forms you’ll need, but you may want to consult a tax professional to ensure you’ve identified all the tax breaks you may qualify for and double-check you are filing correctly.[4]

Disadvantages of a Sole Proprietorship

Of course, you’ll need to weigh any possible downsides. The most significant drawback for many is that sole proprietorships have unlimited personal liability, meaning your personal assets are at risk because you’re personally responsible for covering any business debts or damages.

In addition, sole proprietorships may struggle to attract investors and secure funding, as the business is tied to the individual owner's creditworthiness. Another issue to keep in mind is that the “complete control” aspect that’s a definite benefit for a sole proprietor also comes with a burden: the same solo decision-making authority that brings freedom also means you’re the only one responsible for the business, which can potentially lead to burnout.

Finally, when a sole proprietor retires or passes away, the business typically ceases to exist, making it difficult to transfer ownership or create a lasting legacy.

Sole Proprietorship vs. Limited Liability Company (LLC)

Taxwise, a limited liability company (LLC) and a sole proprietorship are similar in that the company itself doesn’t pay the taxes; its owners (known as members) include profits and losses on their own personal tax returns.

However, it offers the benefit of a distinct separation between personal and business assets, which may provide liability protection for the owners. This may make it a more attractive option for entrepreneurs seeking to shield their personal assets and establish a clear distinction between their personal and business finances.

Is a Sole Proprietorship Right for Your Business Endeavor?

A sole proprietorship can be an ideal way to start a business venture, given its simplicity, flexibility and tax benefits. However, because it also comes with unlimited personal liability and limited scalability, it may not be right for you.

As you weigh your business structure options, consider the trade-offs between ease of setup and liability protection, as well as your own risk tolerance and growth aspirations.

Remember, as your business evolves, you can reassess and adjust your structure to meet new challenges and opportunities.

PNC small business bankers can be a great resource to tap as you start or grow your business. Learn more about our products and services.