A sole proprietorship exists when an individual owns and operates a business in his or her own name. It is by far the easiest business organization to form. Usually, the proprietor can start his business with nothing more than a checking account.

The net profits of the sole proprietor, if any, constitute individual income, taxed at the owner’s individual income rates. One of the negative aspects of sole proprietorship is that the owner is personally liable for all business debts. If the business doesn’t succeed, personal assets, such as the proprietor’s home, car, and personal bank accounts, may ultimately be used to pay the business debts.

A sole proprietorship is owned by only one person. Other individuals who work in the sole proprietorship must, by definition, be employees or independent contractors.

Important tip: If your business is currently a sole proprietorship, consider converting to another type.