What is sole proprietorship?

Sole proprietorship is a type of business with only one owner. The owner has complete authority over every aspect of the business.

A sole proprietorship is not a separate legal entity – it’s considered an extension of the owner. But you can operate under a trade name, like “Bob Smith Plumbing.”

Sole proprietorships are easy to set up. Because the business uses your individual tax code, you don’t need to register as a business. But depending on your field you may need a license – such as a food and liquor license, or an admission to practice law.

Sole proprietorship taxes are easy, because all income the business earns is treated as personal income. But this also means the owner is accountable if the business runs into financial trouble, like debt or bankruptcy. The owner’s personal assets can also be at risk if a claim is made against the business – for faulty workmanship or malpractice, for instance.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.