If an individual starts a business by themselves without taking any legal precautions, they have created a "sole proprietorship". This is a business in which the owner is the business. This offers great flexibility: if the owner wishes to work, they may do so. If they wish not to work, nobody will compel them. The owner can come and go as they please, set prices as they desire, hire the employees they want, and fire employees they don't like, all without consulting other owners.
These are definitely advantages! It lets businesses be nimble, and one can start such a business without legal formalities. In fact, many small businesses in the United States begin as sole proprietorships. If you've began a solo business enterprise without taking other legal steps, then you created a sole proprietorship without realizing it.
At the same time, operating as a sole proprietor has major disadvantages. First, it can be hard to raise capital for the business, because you cannot offer ownership rights in the form of stock or partnership interests. Second, this type of business form has unlimited personal liability. Because the owner is the business, the owner faces unlimited personal liability for the business. If someone slips and falls on the premises because the owner was negligent in cleaning up a spill, and then sues and wins, the owner may lose their home or retirement account, or be forced into bankruptcy.
For these reasons, particularly the second, careful entrepreneurs give thought to liability as they begin a business. Some feel comfortable by purchasing liability insurance, while many others take the steps to create a business entity that offers a liability shield, such as a Limited Liability Company or LLC. Forming an LLC is relatively painless and can protect the personal assets of the owner.
A sole proprietorship is a very common way to start a new business. No legal formalities need to be followed, making this a very easy way to begin an enterprise. At the same time, the absence of a liability shield means that the proprietor will be personally responsible for the liability of the business.
