Business Entities 101: Sole Proprietorship

Welcome to the last post in the Business Entities 101 series. This post will cover sole proprietorships. We will be discussing what this entity is, how it is created, the liability protection it provides, how it is taxed, and if this entity is suitable for your business.

What is a sole proprietorship and how is it created?

A sole proprietorship is a business entity that consists of one person who owns and operates a business. It is probably the most common business entity in the State because it does not require any formal certificate of formation. To put it simply, all you need to do is open up shop.

What is the liability protection of a sole proprietorship?

The short answer is, there is none. The owner of a business, operating as a sole proprietorship, can be held liable for all the debts and obligations of the business. Having insurance is always prudent with any business, but more so if you are operating as a sole proprietorship.

How are sole proprietorships taxed?

A sole proprietorship is taxed just like a partnership. The owner reports profits and losses of the business on their income tax return.

Is this the business entity for you?

Again, of course, it depends. The fact that you do not need to file anything with the State makes this the easiest business entity to form. However, a sole proprietorship may not be the best business entity to operate under primarily because there is no liability protection, which can be an area of concern. But, there are reasons why a sole proprietorship could be for you. It depends on the type of business and what you want to accomplish. Consulting with a startup attorney can really help you figure out if this is the best entity for your business.