When someone starts a new business, they should consider four important factors:
- ease of organization: what requirements need to be met to start and operate a business?
- liability: what debts or obligations may they incur in operating the business?
- tax consequences: how much will they have to pay to the federal, state, and local governments to operate the business?
- capital: how will they raise the money to operate, invest, or expand?
However, people do not always give a lot of thought to these factors or the structure of a new business that they are forming. This results in them not actually making a choice as to how that business will be organized and operate. Ease of organization, which is the simplicity in meeting the requirements for beginning and operating a business, is an important consideration.
If no serious thought is given to the form of the business and if only one person will be the owner of the business, that person is actually making the choice to operate the business as a sole proprietorship, and in that sense the sole proprietorship is the default form of business organization.The defining characteristic of a sole proprietorship is that it is unstructured and has only one owner. When someone starts a new business without considering the factors set out above, the usual result is that they start a sole proprietorship.
Formation of a Sole Proprietorship
Common Sole Proprietorships
As is true with other business structures, sole proprietorships are governed by the laws of the state where the sole proprietorship business is located. Those laws typically do not require much of the sole proprietor. A business license, which is approval from a local government entity authorizing the operation of a business, will probably be required. Also, if the business will operate under a name other than the sole proprietor's name, state law may require that the sole proprietor register that fictitious name, or adopted name.
Some examples of common sole proprietorships include an accountant who works for clients only during tax season, a master crafter who works alone and whose creations in wood are well-known in the local community, a carpenter who has an assistant and works on relatively small jobs, a freelance writer, and a caterer who hires workers to assist with specific catering jobs.