Do Sole Proprietorships Have Stockholders?

When you start a new business, the type of entity you use to run it will determine its ownership structure. Each business type, including sole proprietorships and corporations, has a unique ownership paradigm that is defined by state law. Holding shares of stock in a business is an ownership method that is particular to corporations and not applicable to sole proprietorships.

Corporations are designed by law to vest ownership of the business in shares of stock. An individual's percentage ownership interest in the corporation is determined by the number of shares of stock he owns compared to the total number of outstanding shares. Selling stock in a corporation is the way the company raises equity capital and brings on investors and business partners.

A sole proprietorship is a business activity that operates under the name and responsibility of the owner. By law, a sole proprietorship can only have one owner who operates the business as another aspect of her personal identity. Because the business can't have additional owners, the proprietor can't bring on investors or partners by selling shares of stock. If a sole proprietor wants to bring on additional business partners, she must change the structure of the business.

The titles "shareholder" and "stockholder" are common business terms that are in the forefront of the public consciousness, because public corporations are the highest-profile type of business entity, and most people are aware of corporate stocks that are traded on public stock exchanges. It's easy to assume that every type of business has stockholders, but that ownership structure is restricted to corporations. Even if a sole proprietorship could have multiple owners, they would not be stockholders.

If a sole proprietor is ready to expand and bring on investors or partners and wants to do it by selling shares of stock, he must incorporate the business. Incorporation entails setting up a separate business entity by filing articles of incorporation with a state agency. In the articles, the owner establishes a total number of shares that the corporation is authorized to sell. Once the agency approves the formation of the corporation, the proprietor can transfer assets that were used for the sole proprietorship into the name of the corporation in exchange for shares of stock that will represent the owner's interest in the company. He can then sell shares of the corporation to other people at his discretion. These new owners would be the corporation's stockholders.