What is a sole proprietorship?
A sole proprietorship (or sole trader) is the simplest way to run a business. There's usually little or no registration required beyond a business name and tax registration.
Advantages
- Easy and cheap to set up
- Full control over decisions
- All profits belong to the owner
- Simpler accounting and filing than a company
Disadvantages
- Unlimited personal liability: personal assets can be used to pay business debts.
- Harder to raise investment or bank finance.
- The business may end with the owner.
- At higher profits, personal tax rates may exceed company tax rates.
Tax and accounting
- Business profit is taxed as the owner's personal income. In the US it's reported on Schedule C with self-employment tax.
- The owner takes money out as [owner's draws](/glossary/owners-draw), not salary.
- Keeping a separate business bank account and proper [bookkeeping](/glossary/bookkeeping) is strongly recommended.
Sole proprietorship vs limited company
A limited company (or LLC) is a separate legal entity, protecting the owner's personal assets and potentially offering tax advantages, but it comes with more administration.