Sole proprietorships are the most basic forms of business organization in the United States. Sole proprietorships act as pass-through entities in the eyes of the law and are treated as the business activities of individuals for tax purposes. Certain types of businesses are ideally suited for the sole proprietorship business form, while others call for more complex forms of organization, such as the limited liability company or S-corporation forms. Understanding which types of businesses are best suited for the sole proprietorships business form provides insight into your registration decision.
The sole proprietorship form of organization does not provide personal protection against a business's debts and obligations. This means that a small business owner can be held personally responsible for outstanding debts if the business closes its doors, and can be held liable for legal actions taken against the company.
Not all businesses really need this level of protection. Businesses that operate on a shoestring budget with virtually no debt, such as a small lawn-care business, can present very little financial risk to company owners. Companies in industries with historically low rates of legal trouble do not necessarily need protection from legal liability. A local newspaper, for example, is unlikely to be sued for millions of dollars from a liability case.
The sole proprietorship form is ideal for small business owners who want to retain managerial control over their companies. Sole proprietorships are never subject to acquisitions like corporations, and strategic control cannot be transferred without the full consent of the business owner. Many small businesses rely to a great degree on strategic guidance from company owners for success, and small business owners are often reluctant to share strategic control with anyone else. The owner of a local retail shop, for example, may always want control over purchasing and store design decisions.
Private partnerships operate in virtually the same way as sole proprietorships, with the exception being that partnerships share company ownership between at least two people. The sole proprietorship form of organization is well suited for entrepreneurs who are confident that they do not want to go into business with anyone else and will most likely not want to bring a partner on board in the future. The smallest sole proprietorships exist simply to take care of a single company owner and the owner's family, and owners often plan to keep it that way for years into the future. A small bookstore, for example, can be an outlet for a single entrepreneur's passion without needing any help from a business partner.
Read More: Can an LLC Be an Individual or Sole Proprietor?
Business owners who wish to avoid time-consuming administrative details and costly fees when registering their businesses should consider organizing their companies as sole proprietorships. This form of organization imposes the least amount of administrative and regulatory requirements, allowing a business to focus on growth and profitability rather than the myriad of legal compliance issues faced by corporations. When opening a local bakery, for example, business owners most likely wish to go through as simple a registration process as possible.
David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.