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What is a sole proprietorship?

Author:
Harold Averkamp, CPA, MBA

Definition of Sole Proprietorship

A sole proprietorship is a form of business organization that is owned by one person and is easy to start. The owner is referred to as a sole proprietor.

It is important to note that a sole proprietorship is not legally separate from its owner (as would be the case with a corporation). However, the sole proprietor may be able to register as a limited liability company in order to limit his or her personal liability. You should seek professional advice as to the appropriate form of business for your situation and location. In addition, your state government will likely have an office to assist in starting a new business.

Accounting for Sole Proprietorships

In accounting, the balance sheet of the sole proprietorship reflects the accounting equation: Assets = Liabilities + Owner’s Equity.

Owner’s equity consists of the owner’s capital account and a drawing account. The drawing account is a temporary account in which the owner’s current year draws or withdrawals are recorded. The sole proprietor withdraws money for personal use because he or she is not paid a salary or wages. As a result, the income statement for the sole proprietorship business does not include an expense for the owner working in the business. This means that the reported net income is the total return for the owner’s work and investment.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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