Proprietorship Definition & Examples

Sole proprietorship is the simplest form of business structure. If you run your own business and nobody else has any involvement in the ownership of that business, then you enjoy sole proprietorship. 

What is sole proprietorship?

Sole proprietorship is not a legal definition, but instead simply describes a business structure in which a single individual owns the business and is responsible for any debts accrued by that business. It doesn’t matter whether this business is simply known by the name of the sole proprietor, or whether it has been given a business name, for example Barry’s Barbershop, because simply naming the business doesn’t create a separate legal entity. 

The impact of a sole proprietorship

The main impact of running a business as a sole proprietorship is that there is no legal distinction between the business as an entity and the person who owns that business. In practical terms, this means that, as the sole proprietor of your business, you will be personally liable for any debts that the business incurs, unlike business structures that provide limited liability. 

The pros of sole proprietorship

The overriding advantage of running your business as a sole proprietorship is the sheer simplicity of this approach. There’s no cost to setting up the business and you don’t need to register your trading name separately – put simply you only need to start trading to enjoy the benefits of sole proprietorship. It is the perfect set-up for self-employed contractors, business startups and any home-based business. 

The other pros of operating as a sole proprietorship include: 

• Ownership – you own 100% of the business, meaning you’re free to make all decisions relating to that business without, as with other kinds of business structure, taking votes or holding shareholders meetings. Similarly, you can choose the hours you work in response to customer demand rather than the wishes of fellow owners. 

• Taxes – the simplicity of a sole proprietorship comes into its own when dealing with matters of tax and accounting. There’s no need to fill in a separate business tax return because the income generated through the business can be declared via your personal tax return. As sole proprietor you can calculate the profit generated by your business by deducting allowable expenses for items such as travel, advertising and a percentage of costs such as rent and heating if the business is being operated from your home. 

• Other income sources – another tax-related advantage is that you can deduct any losses generated by the business from other sources of income. This is useful if you are transitioning from employment to self-employment over a period. 

The cons of a sole proprietorship

The basic disadvantage of operating under sole proprietorship is the risk of feeling isolated. Unlike other business structures, sole proprietorship will leave you without any employees or partners who can join in discussions on business matters or new ideas. Other cons include:

• Legal responsibility – a sole proprietorship means there is no legal separation between you and the business. If the business fails and debts are incurred, creditors can pursue your personal assets – up to and including your home – to satisfy those debts, and the liabilities in question could be without any limit.  

• Income – the simple tax situation for sole proprietorships is an advantage, but the downside is that you don’t have the flexibility available to an incorporated business, which can set specific payment dates and types for owners.   

We can help

Sole proprietorship can simplify how a business runs, but keeping payments flowing through that business will still need the help of the right experts and the technology they provide. Partnering with a payment platform like GoCardless deals fully with this part of business, and that includes the more complex aspects such as dealing with ad hoc payments or recurring payments.