A sole proprietorship is an unincorporated form of a business. This type of business is not a legal entity and actually refers to the person who owns the business. It is one of the most popular forms of business because of its simplicity, ease of setup and minimalistic cost.
The inclusion of this entity in the USA is interesting. In 1700 and 1800’s, the majority of the USA population was self-employed and was associated with Farming or other fields. At that time, when the USA constitution was getting framed in 1789, the legislatures borrowed the concept of sole proprietorship from the common law to include all these self-employed business owners under the tax net and to also regularize their businesses. According to Investopedia.
“Common law is a collection of unwritten laws which evolved from the different decisions made by the different courts and thus setting the precedences”. Though this type of business form is very popular it has some high risks associated with it. In a sole proprietorship, the owner is personally liable for all sorts of business debts or other business issues.
In case the business faces some financial crisis, the creditors can file a lawsuit directly against the owner of the business and if successful the owner had to pay all the debts with his or her own personal money.However, there are certain cases where sole proprietorship is less risky and makes sense to proceed with. One such example is early life startup. In the initial days of the startup, the founder is usually working all by himself. Most of the assets in early-stage startups are owned by the founder and purchases are made on their own names.
Further, since they are in a very early stage and are not looking to raise money, they can work as a sole proprietorship. This also helps them invest the money in their product rather than incorporating a business entity and spending endless time making sure they are filing all the due processes. Though, once they feel that they should raise more money from external investors, they should move from sole proprietorship and incorporate a separate business entity.1 Common Law By Investopedia.