Sole proprietorships are entirely owned and operated by one individual. The business is not incorporated, and the owner earns all of the profits, but also assumes all of the losses. The owner’s individual tax rates apply to all of the business’ profits or losses. The key advantage to a sole proprietorship is that it is very simple and inexpensive to organize and operate. Moreover, tax issues are relatively uncomplicated with sole proprietorships because business owners can use business assets for personal expenses, and vice versa.
While sole proprietorships have the advantage of simplicity, they also have their disadvantages. Because business owners are permitted to intermingle personal and business assets, there is unlimited personal liability. This means that creditors can go after a sole proprietor’s personal assets to recover business debts. Planning and evaluation can also be difficult because there is no clear line between personal and business assets. Lastly, lenders may be more reluctant to deal with sole proprietors than with owners of other business entities.
