By far, sole proprietorship are the most popular form of business ownership. Starting your entrepreneurial journey as a sole proprietorship is also the easiest route for a startup business owner to take as the paperwork and compliance requirements are minimal. However, there are risks inherent in this type of legal structure, too.
Here’s what you need to know about sole proprietorship.
What is a Sole Proprietorship?
By default, states consider a single-owner business (or a married couple who co-own a business) to be a sole proprietorship unless the owner or owners register the business as another legal structure such as a Limited Liability Company (LLC), Partnership, or Corporation. Also, unlike other legal entities, sole proprietors are not employees of their companies. They do not receive a W-2 or file separate business taxes, nor are they required to register the business with the state. Sole proprietorship do not have any formal document requirements unless the type of business requires the owners to obtain specific licenses and permits.
Many freelancers, consultants, and other creative service providers work as sole proprietors. But, really, the sole proprietorship structure is available to entrepreneurs in almost any industry, from retail to landscaping to cleaning. It’s more common for small business owners to start as sole proprietors and then incorporate as their businesses grow and they need to hire employees. Another reason for sole proprietors to incorporate is if they want to attract investors.
How Do I Know If I Am a Sole Proprietor?
Essentially, the Internal Revenue Service (IRS) deems anyone who starts a business by themselves or a married couple who start one together to be sole proprietors if they don’t incorporate that business.
If your business is an LLC, even if you are the sole member of that LLC, you are not considered a sole proprietor since LLCs must register with the state government and are required to file paperwork, pay fees, and pay business taxes. For more about LLCs, check our page on how to form an LLC.