Sole proprietors

Many small businesses start with the owner as sole proprietor. This is the oldest and simplest form of business structure. Basically, it means the owner is the manager.

If you are a sole proprietor, the business debts are yours in the same way as the profits, and your creditor can pursue you and seize your personal assets to pay your business debts. This is called having ‘unlimited liability’.

These days a sole proprietor can incorporate - that is, become a one-person company. For more on the advantages of forming a company, see ‘Companies’.

There is no particular law covering sole proprietors, other than the requirement to register your business name if it is different from your personal name. You are taxed as a single person and your business and personal assets are not distinguished as separate entities. Generally, the more you earn, the higher the rate of income tax you pay. Therefore, if you split your income between two or more people who pay tax at a lower rate, you can pay less tax.

Taking holidays may also be difficult if you are a sole proprietor as it’s often necessary to find someone to run the business while you are away, and delegating the full responsibility to someone else may not be easy for you if you are used to controlling everything yourself. It might also be difficult to find someone who is able and willing to fill in for you.

As the business grows, many sole proprietors start to recognise the need to:

* share the responsibility;
* have a second opinion on management decisions;
* find a way to pay less tax; and
* avoid the worry of losing everything if the business fails.

If you are considering changing from a sole proprietorship to a partnership or company to resolve some of these issues, it is usually a good idea to get legal and financial advice first to work out which structure would suit you best.