A sole proprietorship is owned and operated by one individual. It is the least complicated and usually the least expensive way to set up and run a business. A sole proprietorship has no legal existence apart from its owner.

The advantage to a sole proprietorship is its simplicity and the relative freedom from government regulations and special taxation. The owner controls the business, makes decisions without having to consult co-owners or partners, and is entitled to all the profits (or losses). The business income is taxed to the owner via a Schedule C attached to the individual's Form 1040. Income taxes are not withheld on business income, though quarterly estimated taxes may be required.

Payroll Taxes apply to any employees of the business. The sole proprietor pays self-employment tax rather than social security tax (and gets a tax deduction for 50% of the tax paid). No social security tax need be paid on the owner's children under the age of 18 who work in the business.

A major disadvantage to the sole proprietorship form of operation is unlimited liability, not only for debts of the business, but for lawsuits brought against the business. Liability extends to the proprietor's personal as well as business assets.

The ability to raise capital for the business is limited to the amount the individual can secure personally. Since under-capitalization is a major cause of business failure, this factor can be significant.

Continuity of a sole proprietorship is limited. Since the individual is the business, the business enterprise may be crippled or terminated if the owner becomes ill or dies. A sole proprietor can establish a retirement plan. Good options include an IRA, a SEP, or a Keough. Each type of plan has its own restrictions and requirements; the business owner should review all options in order to select the best plan for him or her.

The deductibility of fringe benefits is very limited in a sole proprietorship. In fact, this area comes under close scrutiny by the IRS because of concern that personal expenditures might be deducted as business expenses.