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What is a sole proprietorship?

When entrepreneurs starts businesses in Maryland, they have a number of different business structures from which to choose. One of the simplest options is a sole proprietorship. The sole proprietorship allows business owners to quickly launch their company with little paperwork or administrative requirements. It also has very little reporting requirements and it gives owners the ability to retain complete control of their business. For many businesses, a sole proprietorship structure is an excellent choice.

In a sole proprietorship, the business owner and the business are legally considered to be one and the same. That allows for easy business management. There are no forms or approvals needed to form a sole proprietorship. Also, since the business is legally considered to be the same as the owner, taxes are very easy to report. The business income is simply reported on the individual tax return along with any other income the owner may have, and the owner maintains total control over the business's operations.

There are, however, a few important considerations with sole proprietorships. Because the owner and the business are legally the same, the owner is personally responsible for all of the business's liabilities. That could become a very big problem if the business doesn't perform and is unable to pay its bills. A sole proprietorship could have difficulty raising capital, as since there can only be one owner, a sole proprietorship can't sell shares to investors. Some lenders may also be hesitant to offer capital because they may be worried that the owner could default.

A sole proprietorship could be the most appropriate structure for many businesses. However, if entrepreneurs want to raise capital or separate themselves from their business, they may want to look at another structure.

Source: United States Small Business Administration, "Sole Proprietorship", October 07, 2014

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