The vast majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, they are the business.

A sole proprietorship is not a separate legal entity; the owner is the business.

No legal formalities are necessary to create a sole proprietorship, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor.

Because a sole proprietorship is not a separate legal entity, it terminates when the sole proprietor becomes disabled, retires or dies. As a result, a sole proprietorship lacks "business continuity" and does not have a "perpetual life."

During his or her lifetime, a sole proprietor can sell or gift any asset because there is no legal distinction between the business and the sole proprietor. At the death of the sole proprietor, the business is usually dissolved. However, the proprietor's estate can sell the assets or continue to operate the business if the survivors have the necessary skills.

Management control of the business is completely in the hands of the sole proprietor. There are no shareholders or board of directors to answer to.

Because a sole proprietorship is not a separate legal entity, the sole proprietor is personally liable for all debts and other business liabilities. The sole proprietor's personal assets are fully exposed to these liabilities.

A sole proprietorship is not a separate taxable entity. Income and expenses from the business are reported on a Schedule C attached to the individual's Form 1040. Net income thereby carries over to the sole proprietor's personal tax return. Income and appreciation cannot be shifted to other family members by making them owners of the business.

Easy to form, operate and terminate; simple taxation—that is, net income/loss is carried over to proprietor's personal return; owner has absolute management and control of business.

Unlimited liability for business debts and other liabilities; lack of continuity—when owner is gone, so is the business; difficult to transfer to family or others; no income or appreciation shifting.