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Defintion of a Sole Proprietor

In this article we’ll cover the definition of sole proprietor. There are a multitude of small business owners in the world and they each have their own individual business classification.

Small business joint ventures can either be a partnership, an LLC or even a corporate entity.

When the business owner operates solo (or opts not to form a legal partnership entity) then that owner is known as a sole proprietor.

A sole proprietor is an independent contractor or small business owner whose business venture does not exist as a separate legal entity.

Essentially, if you are a sole proprietor then you are your business.

Since there is no partnership or shareholders associated with the business, the business can be managed, sold or transferred at the sole discretion of the business owner.

Definition Of Sole Proprietor – Business Formation

A sole proprietorship is the most common of all small businesses because it involves no complexities to set up.

Other than business license requirements in the state where the sole proprietor operates, there are really no regulations imposed on sole proprietorships.

Additionally, there are no corporate or business taxes associated with sole proprietorships as a sole proprietor files

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an individual tax return as opposed to filing a business tax return.

When it does come to filing taxes, a sole proprietor will be responsible for paying self employment tax.

The income tax, however, associated with the business is known as “pass through” income.

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That is to say, it passes through the business entity and is exclusively taxed on the individual’s return.

Relax, there’s good news: sole proprietors are only taxed on their profits and not gross income. Any overhead required to operate a business is tax deductible.

If there was a major misconception about the definition of sole proprietor it would be that a sole proprietor is an island unto himself. For example, when it is said a sole proprietorship is not a partnership this does not mean that the business never works in conjunction with others.

It is perfectly acceptable to maintain the mantel of sole proprietor even if the business employs a number of people.

From a business/legal standpoint, a partnership is defined not as collusion but as joint ownership. That is, a pool cleaning sole proprietor teamed up with another pool cleaning business for a few jobs both would still be considered a sole proprietorship.

However, if both pool cleaning businesses merged into one entity of shared ownership then such a venture would be a partnership

Liability Drawback

There is one fairly big negative point in the definition of sole proprietor – it’s

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the liability involved. A sole proprietor is personally responsible for the business and assumes all liabilities and debts associated with it.

A sole proprietor would not be able to acquire a credit card in the business’ name and any bankruptcies associated with a sole proprietor would be personal bankruptcy.

In other words, a sole proprietor’s personal assets are not provided any special protections when the business assumes debts. This could prove to be very financially devastating in situations of

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litigation or financial losses.

Those looking to protect their personal assets would be better suited to incorporate an LLC or corporation.

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