A sole proprietorship is a business owned and operated by one individual.  Its advantage is that you have a lot of freedom from regulations, but there are numerous disadvantages.

It is an unincorporated form of business and is the simplest business entity to organize and maintain.  In essence, you are the business – there is no separation between the owner and the company.

Any liabilities or profits the company makes, you make.  Your personal tax return contains all of the income and deductions you’re using for the business, in addition to your personal financial information.

These days, lawsuits can haunt even the most solid businesses.  With a sole proprietorship, you’ll have absolutely no asset protection.  That means every one of your personal assets can be lost in the event someone sues your business and wins.

Even if your business has ample insurance, it might not be large enough to cover a claim if the event warrants a major payment to the defendant. 

Other disadvantages to launching a sole proprietorship are that it’s difficult to sell the business to an outside source.  The value of the business revolves around the owner, not the business itself.

And if you die, the sole proprietorship disappears with you.  Your heirs cannot keep the business going unless they keep the assets and start a new business from scratch – re-registering it, getting a new EIN, etc.

They also can’t sell it to someone else, but they can sell the assets of the business.  With other forms of corporations, your heirs can enjoy the benefits of a corporation’s perpetual existence – meaning it never ends until it is dissolved formally.

To form a sole proprietorship, all you have to do is file a DBA (Doing Business As) with your local authorities.  It will appear as something like, “John Doe, Doing Business As Doe Air Duct Cleaning.”

It’s not expensive and it’s not complicated to set up.  You’ll have to make sure you withhold all of your income tax – which is something that normally, a corporation would do for you if someone else employed you.  Your self employment tax includes social security and Medicare payments.