How to Start a Small Business
as a Sole Proprietorship

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So this organization exists by default when you go into business and start earning money and incurring business-related expenses. Also, if you are earning money on the side as a contractor or doing a little "moonlighting" you would be a sole proprietorship as well.

The Advantages

The benefit of sole proprietorships is that they are so simple. As stated, they don’t really require special administration and are also the simplest in terms of paying taxes. In this regard, you simply track the money you receive and the expenses you incur and pay income tax on what’s left over (the profits).

The Disadvantages

Frankly the disadvantages are major. If you are doing anything above and beyond simple contracting work I would not recommend starting a small business as a sole proprietorship because you are totally liable for anything that might happen in the business.

For example: Say you are earning money as a bike messenger and one day you hit someone with your bike, seriously injuring that person. You can be sued for a lot more than you ever hoped to make as a bike messenger. Because you are a sole proprietorship, you can be sued for everything you personally own -— your home, your car, and personal possessions.

Alternatively, if you had run your messenger business as any of the business forms that provide limited liability such as a corporation or limited liability company/partnership, only the company itself would be liable. If the damages were excessive the business would simply cease to operate / go bankrupt.

The bottom line is that if you plan to do anything beyond being a contractor or doing a little extra work part-time, do not operate as a sole proprietor.

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