Opportunities of Sole Proprietorships

By Cindy DeRuyter, J.D.

Opportunities of Sole Proprietorships

By Cindy DeRuyter, J.D.

If you are considering going into business for yourself or have already decided to start your own company, you need to determine what type of legal entity to use. If you will be the sole business owner, you might consider establishing a sole proprietorship. This type of entity is relatively fast, inexpensive, and easy to establish and maintain. However, while there are potential opportunities for sole proprietors, you should also consider potential challenges before choosing this form of business.

Man typing on computer

Simplified (or No) Formalities

One of the factors that makes sole proprietorships so attractive to people who want to start their own businesses is the ease of creating the legal entity. The actual steps you need to take vary by state, but in general, starting a sole proprietorship is simpler than starting a corporation, partnership, or limited liability company (LLC).

If you intend to do business under your legal name, you may not need to file anything with the Secretary of State's office, or other state entity in charge of registering businesses. Some states require sole proprietorships to file registration forms or to publish a notice in a legal newspaper; others only require these steps when the name of the business is something other than the owner's legal name.

In contrast, corporate entities, LLCs, and partnerships must file legal documents with the state and may need to prepare agreements governing business operations.

Ability to Start Business Operations Sooner

Because it is relatively simple to start a sole proprietorship, business owners who choose this type of entity may be able to start offering their products or services faster than they would as another type of business entity. Sole proprietors, as one-person management teams, don't need to gain consensus from others on business decisions or enter into operations agreements.

Flexibility to Transition to Another Entity Later

Sole proprietors can also change their business entity type to a corporation or LLC relatively easily.

Some entrepreneurs decide to test the waters with sole proprietorships first, transitioning to another type of business entity after they can see that there is a market for their products or services. When a business owner takes this approach, they can avoid potentially significant expenses and formalities if it turns out the business is not as successful as they'd hoped.

Considerations and Potential Challenges

Before starting a sole proprietorship, evaluate the following factors:

  • No liability protection. Unlike the owners of LLCs or corporations, sole proprietors are not protected from personal liability. In fact, a sole proprietor faces virtually unlimited liability for the business's financial obligations. If someone sues the sole proprietorship, the owner's real estate and other assets could be considered available assets to satisfy court judgments.
  • Potential difficulty raising capital. It can sometimes also be more difficult for sole proprietors to raise capital or obtain financing through traditional channels. Banks and investors may be more likely to bet on incorporated businesses or on those with formal agreements in place.
  • Record-keeping. Sole proprietors sometimes assume that because their companies are not registered with their states, they don't need to keep any formal records. It's important for entrepreneurs to maintain reliable business records of sales, expenses, inventories, accounts receivable, and accounts payable for tax purposes. Having adequate documentation may also help sole proprietors obtain financing.

Establishing a sole proprietorship is a smart move for many entrepreneurs, allowing them to get their businesses up and running fast with limited out-of-pocket expenses. If you are not sure whether you should establish a sole proprietorship, an LLC, or a corporation, you may want to talk to a business law attorney licensed in your state. An attorney can help you establish a sole proprietorship or another type of business entity. Alternatively, you can use our online service to start your new business.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.