Sole proprietorship isn’t as popular as in the old days — those days before LLC’s. But as the LLC newness has worn off, people are taking another look at sole proprietorship. More about it when we discuss the LLC, but some states (including KY) have established annual reporting requirements and annual fees associated with LLCs, including the single member variety.
The number one advantage to a sole propietorship is the ease and low cost of establishing. Other than state and local registrations (and an EIN if you have employees), you just start doing business. Also, it has the lowest administrative costs. The business income is taxed to the owner on his or her individual tax return on a schedule C or if a farm, a schedule F. No separate return to prepare. The business owner is not an employee, and pays self-employment tax as opposed to social security/medicare tax.
The major disadvantage to a sole proprietorship is the unlimited liability (including business and personal assets) for debts and any lawsuits brought against the business. Some risk can be covered by insurance, but depending on your situation, you might be wise to discuss with an attorney.
Other disadvantages include, as the same implies, it can ONLY be you. If you have a partner, then you can not be a sole proprietor. In addition, It is difficult to transfer interest of a business where the owner is a sole proprietor. Fringe benefits for the owner are generally not deductible.
For low cost and minimum red tape, it’s the sole proprietorship.