A sole proprietorship is you doing business as yourself, even if you use a fictitious business name. It is simple, but affords no asset protection. Anything you do in business as a sole proprietorship -- or an employee of yours does -- is your personal liability and this exposes your personal assets to liability.
Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. For instance, if you are a freelance photographer, producer or writer, a contractor or builder who takes jobs on a contract basis, a salesperson who receives only commissions, or an independent contractor who isn't on an employer's regular payroll, you are automatically a sole proprietor. Many entrepreneurs start out as sole proprietorships because they cannot afford the expense of setting up a partnership or corporation. These entities require filings and reporting that can be complex, and in some instances require an attorney’s assistance. A new business with a low-cost product and low overhead may not need or be able to afford to go through this process.
When making the decision to operate as a sole proprietorship, one thing to be aware of is possible liability. In the eyes of the law, a sole proprietorship is not legally separate from the person who owns it. The fact that a sole proprietorship and its owner are one and the same means that a sole proprietor simply reports all business income or losses on his or her individual income tax return. You may have noticed this in your return packet IRS Form 1040, Schedule C.
A sole proprietor can be held personally liable for any business-related obligation. This means that if your business doesn't pay a supplier, defaults on a debt, or loses a lawsuit, the creditor can legally come after your house or other possessions. Additionally, any harm found to be the fault of your business will relate to you as an individual. As with any business decision, it is important to weigh the risks of this choice against the potential benefits.