Let’s take a look at a possible real world example to show how a sole proprietor often begins business:

Let’s assume you decide to start a side business cutting lawns every weekend in addition to your full-time job. You call your business Friendly Grass Cuts. You take no legal actions and do not file any papers with the federal government or your secretary of state. At the moment you hold yourself out as a business and/or take your first offer to cut a lawn, you’ve officially begun your business – as a sole proprietor.

Over time, you do such a good job that your current customers refer your name to other people. You get more calls, become busier, and start making more money. You suddenly have some good problems – you’re too busy to do all the work by yourself. So, you call a few friends to help out cutting lawns with you. At the moment you bring on new workers, the law will either classify these workers as employees or independent contractors. At this point, you’re still a sole proprietorship because you’re the only owner of the business. But you are personally liable to third parties for the acts and/or omissions of you and your workers while cutting the lawns.

For example, assume you or one of your workers forgets to turn off one of your lawnmowers and it runs into a customer’s brand new Mercedes. That customer could sue you for damages to the Mercedes done by the lawnmower (e.g. business asset) and your own car and money in your personal bank account (e.g. personal assets). That is why it is essential to limit your liability so a third party or creditor cannot go after your personal belongings. If you set up your business to limit your personal liability, the Mercedes owner would likely not be able to successfully go after your personal assets like your personal bank accounts.

Next, we’ll go over some advantages and disadvantages in operating as a sole proprietor.