A sole proprietorship is a business that it is owned and managed by one person. If more than one person becomes involved in the ownership and management of the business, it ceases to be a sole proprietorship and becomes either a partnership or a joint venture, depending on the nature of the enterprise.
This does not mean, however, that a sole proprietorship business cannot involve other persons. The proprietor may seek assistance in the running of the business by hiring others, but the relationship must be that of either master and servant or principal and agent. The proprietor may delegate authority to others, but the source of the authority must be the proprietor. In theory, there is no limit to the size of a sole proprietorship, but in practice it is usually a small business with limited capital.
Personal Liability
A sole proprietorship is an extension of the individual owner. The assets and liabilities of the business are the proprietor’s assets and liabilities. The taxes of the business are the proprietor’s taxes. The profits and losses of the business are the proprietor’s profits and losses, and the capital invested in the business is the proprietor’s. The credit of the business is the proprietor’s credit, and the good will of the business is normally that of the proprietor. The torts and breaches of trust of the business are those of the proprietor. And when the proprietor dies, the business normally ceases to exist. In short, the proprietor is the business and the business is the proprietor.
In a sole proprietorship, the proprietor is responsible for all the debts and liabilities of the business. The financial risk extends to all nonexempt property and assets owned by the proprietor, but this risk may be diminished by the purchase of liability insurance.
[column size=”1-4″ last=”0″][/column] [column size=”3-4″ last=”1″]Legal Formalities
There are few, if any, legal formalities involved in organizing a typical sole proprietorship. Because there is only a single owner, an agreement is seldom needed to create the entity. However, written instruments such as leases, notes, mortgages, and the like may be necessary to commence the business of the enterprise. The only expenses involved are the capital requirements of the business, and the only organizing is that of organizing the business itself. The business may be conducted anywhere in any state, or in any number of states, without registration or qualification, unless the business is a licensed or registered trade or profession, in which case the licensing or registration requirements must be complied with.
[/column]A sole proprietorship may conduct business under any name, provided that the name is not the same as or deceptively similar to the name of another firm doing business in the area or another registered or well-known name. If a proprietor wishes to conduct business under an assumed name (e.g., John Doe d/b/a Worldwide Plumbing), the name may have to be registered under a fictitious name statute. Some states prohibit the use of the words “& Co.” and the like when there are no associates in the business. Some states also require the publication of fictitious names for certain periods. The fictitious name registration requirements for a sole proprietorship are usually the same as those for a general partnership
Rights of Transfer
With only limited exceptions, the interest of a sole proprietor is freely transferable. The exceptions arise from the rights, if any, of the proprietor’s spouse under dower, curtesy, or community property statutes, and from the application of bulk transfer or fraudulent conveyance statutes.
There is usually no continuity of existence of a sole proprietorship business upon the death of the proprietor. If the proprietor has delegated extensive authority in the running of the business to others, the authority of the agents terminates upon the death of the proprietor, even if a written instrument provides to the contrary.
If the business is not overly dependent on the personal skills or efforts of the individual proprietor, some degree of business continuity upon the death of the proprietor may be obtained through the proprietor’s will. This is generally accomplished by vesting authority in the proprietor’s executor or personal representative to continue the business so that it may be sold as a going concern or so that a legatee may receive a going business. Because in most states a sole proprietorship terminates as a matter of law upon the death of the proprietor, when the business is continued by the proprietor’s executor or personal representative a new proprietorship is technically created. In New York, and possibly a few other states, the continuity of sole proprietorships is covered by a statute that permits the proprietor’s executor or personal representative to continue the business if authorized by the probate court.