{"id":4874,"date":"2021-09-21T21:56:23","date_gmt":"2021-09-22T02:56:23","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/sole-proprietorship-advantages-and-disadvantages.html"},"modified":"2025-10-28T22:56:00","modified_gmt":"2025-10-29T03:56:00","slug":"sole-proprietorship-advantages-and-disadvantages","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/sole-proprietorship-advantages-and-disadvantages.html","title":{"rendered":"Sole Proprietorship Advantages and Disadvantages"},"content":{"rendered":"\n
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Sole Proprietorship Advantages and Disadvantages<\/h1>\n\n
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\n By Tim Kelly, J.D.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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A sole proprietorship<\/span> is an unincorporated business<\/span> operated by a single business owner<\/span>. Many entrepreneurs<\/span> like to set out as sole proprietorships<\/span> to keep their startup<\/span> costs<\/span> low. However, a small <\/span>business<\/span> owner<\/span> must weigh the advantages and the disadvantages of this form of business<\/span>.<\/p>\n\n <\/div>\n\n\n\n

Many companies start as sole proprietorships<\/span>, and some stick with that business structure<\/span> for their operations. Sole proprietorships<\/span> are businesses where a single person owns and runs a company with no separate legal existence, such as a corporation or limited liability company<\/span> (LLC).<\/p>\n

Sole proprietorships<\/span> have many advantages over other types of <\/span>business<\/span> structures<\/span>. The owners have complete control<\/span> over the entire business, can set up without much formality, and their tax filing<\/span> and accounting are simple. However, there are some disadvantages as well.<\/p>\n

A new <\/span>business<\/span> owner<\/span> should be aware of the potential pros and cons of a sole proprietorship<\/span>.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

Advantages of a <\/span>Sole Proprietorship<\/span><\/h2>\n

Ease of Set Up<\/h3>\n

A sole proprietorship<\/span> is easy to start up<\/span> because there are fewer formal requirements. For example, you do not have to file paperwork with the secretary of state to register it as a separate <\/span>legal entity<\/span> as you would with a corporation or LLC. The owner can operate under their own name or a trade name<\/span> for their business. For a trade name<\/span>, they would apply for a DBA<\/span> (doing business<\/span> as) <\/a>name to use instead of their own name.<\/p>\n

Avoiding Double Taxation<\/h3>\n

Sole proprietors<\/span> have a simplified tax structure and do not pay corporate taxes<\/span> on business income<\/span>. Instead, any profits or losses of the business pass through to the business owner<\/span>\u2019s personal <\/span>tax return<\/span>. This pass-through taxation<\/span> avoids double taxation where profits are taxed at the corporate level and then the personal level.<\/p>\n

However, corporations (that elect S corporation status) and LLCs act as pass-through entities<\/span> where the profits and losses go on an individual\u2019s income <\/span>tax return<\/span> that gives the business owner<\/span> some legal protection<\/span> against business liabilities and avoids double taxation.<\/p>\n

Fewer State Formalities<\/h3>\n

If you set up a corporation, you file articles of incorporation<\/span>. If you set up an LLC, you file articles of organization<\/span>. As a separate <\/span>business<\/span> structure<\/span>, you must file annual reports and pay franchise taxes to the state. There is less record-keeping<\/span> as well since you do not have to create bylaws if you had a corporation or an operating agreement if you formed an LLC.<\/p>\n

Disadvantages of a <\/span>Sole Proprietorship<\/span><\/h2>\n

Unlimited <\/span>Personal Liability<\/span><\/h3>\n

The most significant disadvantage of an owner of a <\/span>sole proprietorship<\/span> is that there is no liability protection<\/span> for your personal assets<\/span>. This means that if anyone sues the business for any reason, your cash, car, or home is on the line.<\/p>\n

This is different from both an LLC<\/a> (limited liability company<\/span>) and a corporation, where there is a strict separation between the business assets<\/span> and the owners\u2019 personal assets<\/span>. When someone sues an LLC or corporation, the most that person can get is its business assets<\/span>. This protects the business owners<\/span>.<\/p>\n

Most sole proprietors<\/span> buy business insurance<\/a> in case they are sued. While insurance can help by providing money to settle lawsuits, it will not always offer complete protection. Many policies only cover certain kinds of cases, such as personal injury suits if someone slips and falls on your property. Any other claim, like a collection action from one of your vendors, is not covered by insurance. Additionally, the money the policy provides may not be enough to cover your damages, which leaves your opponents free to go after your personal assets<\/span>.<\/p>\n

The Business Dies With Its Owner<\/h3>\n

Courts do not see any difference between a sole proprietorship<\/span> and its owner. So when the owner passes away, the business ends unless the owner makes a prudent\u00a0estate plan<\/a>\u00a0that allows the company to continue.<\/p>\n

In a corporation, the business is separate from the owner and is said to have a “perpetual existence<\/a>,” which means that it will continue even if its owners, directors, and shareholders die or leave the company.<\/p>\n

More Difficult to Raise Money<\/h3>\n

Corporations have many ways to raise money to invest in the business. One of the easiest ways for a corporation<\/a> to raise money is to sell shares. Selling shares gives people a piece of the company in exchange for the money they invest. However, a sole proprietorship<\/span> has no shareholders and cannot sell shares without changing its business structure<\/span>.<\/p>\n

Sole proprietorships<\/span> may borrow money just like other business structures<\/span>. However, because there is no separation between business and personal assets<\/span>, many sole proprietors<\/span> need to use their personal assets<\/span> as collateral for the business loan. A sole proprietor<\/span> can even use their home as collateral. If the business fails and the owner does not have enough money to pay the loan, the lender<\/span> can take away the owner\u2019s personal assets<\/span> to get that money back.<\/p>\n

See FindLaw\u2019s small business<\/span> section to help you decide\u00a0which legal structure is best<\/a>\u00a0for single owner<\/span> as well as a helpful\u00a0checklist<\/a>\u00a0for setting up a sole proprietorship<\/span>.<\/p>\n

Get Legal Help Setting Up Your Sole Proprietorship<\/span><\/h2>\n

Although sole proprietorships<\/span> are by far the easiest type of <\/span>business<\/span> entity<\/span> to set up, they also subject the owners to personal liability<\/span> for business debts<\/span>. If you have any questions about the legal implications of a sole proprietorship<\/span>, contact a local\u00a0small business<\/span> attorney<\/a>\u00a0today.<\/p>\n

Related Topics<\/h2>\n