What is Proprietorship?

by Rod Howell, studioD

A sole proprietorship is one of four types of business organizational structures in the United States along with partnership, limited liability company (LLC) and corporation. It is the most commonly used of the four structures and also the simplest business to establish. However, sole proprietorship businesses provide the least amount of protection for their owners, which can affect their personal assets.


The owners of sole proprietorship businesses are in total control of their company’s operations. They make the decisions regarding employee hires, company rules and equipment and supply purchases. Owners also receive all the profits without sharing it, unlike partnerships and corporations. To set up a sole proprietorship, a business owner would only have to register it in the state where he is conducting business. There are no annual fees or periodic filings with the state for sole proprietorships, which are requirements for corporations and LLCs.


Most businesses can operate as sole proprietorships in the U.S. Some of the businesses include retail and grocery stores, auto body shops, toy stores and small and large companies with employees. Home-based businesses such as accounting and consulting firms are also considered sole proprietorships. If someone is a freelance writer, photographer or web designer who makes money from her work and doesn’t consider it a hobby, she is operating a sole proprietorship business.


The profits of sole proprietorship businesses are taxed by a pass-through taxation process. This means the profits of a business flow directly to the owners, who report the income on their individual tax returns. Company profits aren’t subject to federal income taxes at the company level like corporation profits are. This prevents company profits from being taxed twice (double taxation). Partnerships and LLCs are taxed the same way as sole proprietorships.

Naming the Business and Paying Taxes

Unlike a corporation, a sole proprietorship is not a separate entity from its owner. The business can operate under the owner’s legal name or a fictitious name. A fictitious business name is a name created to market the company’s product or service to customers (like a shoe store named Jim’s Foot Apparel). Owners pay self-employment taxes, which cover Medicare and Social Security taxes, but do not have to pay unemployment taxes unless they have employees.


Unlike the LLC and corporation business structures, business owners under sole proprietorships bear all of the responsibility of the company actions and its financial obligations. This means that the owner’s personal assets can be liquidated to pay off business loans and settle lawsuits. Also, unless there is a business continuation plan in place, a sole proprietorship business generally dissolves upon the owner’s retirement or death.

About the Author

Rod Howell is a writer living in Charlotte, N.C. He graduated from Thaddeus Stevens College with an associate degree in administration in 2000. He published the book "Capitol Conspiracy" and regularly contributes to a blog as well as various other websites, drawing frequently from his experience as an insurance agent.

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