Although the field is ever-evolving, there are at this time 4 general structures to run a business.
There is the corporation which is created by government on an application made by individuals who then buy a share in the new creation, after which the individuals are shareholders in the corporation. It has an independent legal existence from the shareholders; it can contract and litigate. Shareholders are not personally liable for corporation's actions (although the government is stepping in more and more on this issue). The corporation is a profit-seeking institution managed by persons chosen by the shareholders.
The second general structure of a business is a society, a not-for-profit or charitable organization, also created by government on the application of individuals, and also having an independent legal existence. But a society does not have shareholders. Instead, people buy memberships. Also, the society is not a profit-seeking device. It is designed to raise just enough money to meet its stated public interest.
The third general structure of a business is a partnership where two or more individuals, or a mix of individuals and corporation(s), do business as a team, share profits, act as agents for each other and remain, as partners, personally liable for the partnership debts.
The fourth and simplest form of a business is the sole proprietorship. As it is the business of a single individual, it is called a "sole" proprietorship.
A sole proprietorship means a single individual is in charge, both running and owning the business. The proprietorship may have employees but only one individual, the proprietor, is personally liable for the business contracts and only that person has the ability to bind the business contractually.
The beauty of a sole proprietorship - the oldest business structure known to man - is that it is very simple set up. There is minimal government involvement, in some cases, just an application for a business license with a municipal or local government, usually with a small annual fee. For example, the City of Victoria, British Columbia, charges $100 a year for business license (as of 2007).
Some jurisdictions may require additional paperwork but in all events, it is typically considerably less than for any of the other three forms of a business. In all events, seek legal advice before starting a business because even for a sole proprietorship, there are usually some specific industries which must comply, even if as a sole proprietorship, with specific additional registration requirements.
A sole proprietorship allows a business to start-up quickly as opposed to the consultative and document-preparation delays inherent in creating a partnership or a corporation.
The relative small amount of paperwork required to start a sole proprietorship translates into a significant reduction in legal fees as the creation of a partnership or corporation is complex and not something a person should do without legal advice.
For some types of businesses, such as lawyers, doctors or other certified professionals (even taxi drivers!), there is, of course, the paperwork associated with their certification or licensing which is not in any way reduced just because they have chosen to practice through the vehicle of a sole proprietorship.
The second significant advantage of a sole proprietorship is the absence of committee meetings.
Ah, the joy!
There is none of the consultation, compromise or hesitation so endemic to the decision-making process of other forms of a business. In today's fast-moving world of commerce, the ability to turn on a dime is a significant advantage; sometimes business-saving.
At the same time, this can be a disadvantage as the attraction of highly motivated and skilled staff is harder when no ownership rights can be tendered to such a prospective employee.
A further non-negligible advantage to a sole proprietorship is discretion: the owner can completely keep to himself the contents of the business' financial statements. There is no one that needs to see these.
The only exception to this is the extent to which a sole proprietor must disclose financial information in his or her personal tax return.
There is no separate tax return for a sole proprietor. Because he or she is the business, the only disclosure required to the income tax authorities is what is set out in the personal income tax return of the owner.
A disadvantage to a sole proprietorship is that the pool of investment capital will be relatively small; limited to the sole proprietor, or whatever he or she can borrow from a rich uncle or grandparent!
Often, investors will want to secure their financial contribution to business by some form of ownership stake - such as a limited partner or shareholder. That is not possible with a sole proprietorship.
But this works both ways in that a sole proprietor does not have to split or share the business’ profit with anybody else.
A sole proprietorship also exposes his entire pool of personal assets behind the business, accessible to anyone who successfully sues the business. In other words, there is personal liability for all of the business debts or torts, although liability in tort can be reduced by securing liability insurance.
A sole proprietorship has no independent legal personality. It is not a "person" independent and separate from its owner and cannot therefore sue or defend actions by itself. In the eyes of the law, the sole proprietorship is the owner and vice-versa.
A further disadvantage to a sole proprietorship is that the law does not so readily extend a helping hand in protecting the business name of a sole proprietorship. For example, for corporations, most jurisdictions will block, upon application, any name of a proposed corporation which is confusing with an existing one.
This is not always the case with a sole proprietorship which, because of its limited registration requirements, may be unknown to corporate registries. Thus, sole proprietorships are left on their own when it comes to protecting the name of their business. This is an issue that must be considered because the name of the business is often a significant asset particularly when the business is established, has a good reputation and is profitable. In today's cut-throat business world, there are always sharks swimming around ready to pounce on vulnerable intellectual property.
Another issue with sole proprietorships is that because they rely entirely on an individual, the business may die with the individual if there is no succession plan.
This also makes it difficult, but not impossible, to sell a business. In a strict legal sense, a proprietorship cannot be sold since it is inextricably linked to an individual. However, a clever lawyer may be able to arrive at the same practical effect by arranging for the sale of a business name or a client list and arrange for the transfer of other contractual responsibilities.
The sudden illness of a sole proprietor can be catastrophic to the business as for the time being, especially in the event of total temporary incapacity, the business becomes rudderless.
Sole proprietors must be very careful about allowing another individual to take partial control of the business or profit-share. Doing so exposes the sole proprietorship to conversion into a partnership, without their even knowing or intending it.
Sole proprietor should be aware that the creation of a partnership is not necessarily a formal event. Partnerships are often created by the simple conduct of two people profit sharing, carrying on a business together or acting as agents for each other.
Historically, but less so now, governments have given favourable income tax treatment to corporations. Depending on the tax rules in your jurisdiction, something a chartered accountant can advise you on, you will want to see which of a proprietorship versus a corporate structure would be most advantageous from a personal income tax perspective and in regards to pocketing profits. What should be noted, however, is that a sole proprietor can write-off business losses from his taxable income.