When deciding which form of legal entity to select for your new enterprise, you will come across the terms solo practice and sole proprietorship. While the terminology might seem similar, a solo practice is a descriptive term rather than a business entity. A sole proprietorship is a business entity with pass-through status.

Solo Practice

A solo practice has one person as the main participant in the business; for example, a physician or accountant working in his own office rather than as part of a professional association is a solo practice. A solo practice can have any of several legal forms, including sole proprietorship, limited liability company and in some states, a C corporation. The solo practice is governed by the regulations pertaining to its legal structure.

Sole Proprietorship

A sole proprietorship is an enterprise that is owned by one person. It could be a small candy shop or a manufacturing plant with more than 100 employees. This is the simplest form of business with the least expense to start. The Internal Revenue Service takes the official stance that the sole proprietorship is an extension of the individual taxpayer. Depending on the nature of the business, some state governments require advanced education or professional licensing before the sole proprietor can hang his shingle. For example, a veterinarian must have the appropriate college degree and pass a licensing exam for his profession.

Similarities

The solo practice and sole proprietorship can hire employees and subcontractors. The owner manages the business and makes all primary decisions, even if he hires other people to supervise the employees. Either designation can be a part-time sideline or a full-time venture. The owner can have income outside the business.

Differences

The sole proprietor is personally responsible for all business debts. He can lose everything he owns personally and professionally. A solo practitioner who formed his business as an LLC has personal protection from business debts; he can lose only the funds he invested in the business. The default tax classification for an LLC with only one owner is the same as a sole proprietor. Some states permit a single individual to form a C corporation and own 100 percent of the shares. However, since that person would also be the treasurer of the business, he is personally liable for any state-imposed penalties as well as unpaid taxes owed to the state or federal government. The owner of a C corporation is not personally responsible for unpaid vendor invoices or other debts the business has incurred unless he has signed a contract guaranteeing his personal assets in the event of default.