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The Sole Proprietorship is the least complicated type of business entity in the USA. In fact, a Sole Proprietorship is a business belonging to a single physical person, but is registered in the relevant State. This form of entrepreneurial activity is used by many owners of small individual businesses in order to continue their business, but in the form of an enterprise, i.e. with the added benefit of official registration.
As a rule, the term "Sole Proprietorship" is limited to the business venture of a single owner. If the entity has more than one owner, it cannot be called a "Sole Proprietorship".
The main drawback of this business form is the unlimited liability of the proprietor, who is liable for the debts of the enterprise with all his or her property, exactly in the same manner if a physical person in unregistered form was carrying out the business. For this reason, following the appearance in the US of a new, more progressive form of enterprise - the LLC, many owners of Sole Proprietorship have re-registered (converted) their individual enterprises into LLCs.
Taxation. For taxation purposes US legislation does not separate the Sole Proprietorship from its owner. All the income of the Sole Proprietorship is automatically regarded as the income of the physical person who is its proprietor.
The following table provides comparative characteristics of Sole Proprietorship and the most popular type of enterprise in the USA - the LLC:
| Criterion | Sole Proprietorship | Limited Liability Company | | Owner of the company | Sole Proprietor | Members | | Liability of the owner | Unlimited | Limited | | Number of owners | One | One or more | | Taxation | The enterprise is not liable for tax. Tax is paid by the proprietor at the rates of tax applicable to physical persons. | The company is not liable for tax. Tax is paid by the members at the rates applicable to them individually. | | Who manages the company? | Sole Proprietor | 1) Members if it is a member-managed LLC,
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2) An individually appointed manager if it is a manager-managed LLC. | | What happens on the death or incapacity of the owner/s? | Automatic dissolution of the enterprise | No consequences. | | Possibility of conversion into another form of business entity. | Possible | Conversion into a General Partnership, a Limited Partnership or a Corporation is possible. |
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