What is a Sole Proprietorship?

As the sold proprietor of a business, you have unlimited liability, meaning that if your business can't pay all it liabilities, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it's an enormous financial risk. They are personally liable for the business's liabilities if they are sued or can't pay their bills.


A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements to know how his business is doing. Sole proprietors don't have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners' equity - not only to track the business, but for the benefit of any future buyers of the business.

A sole proprietorship is an individual or the business who has decided not to carry his business as a separate legal entity, such as a corporation, partnership or limited liability company. If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C "Profit or Loss From a Business" with your annual individual income tax return.