What is a sole proprietorship?

 

  • A sole proprietorship is an unincorporated business owned and run by one individual with no distinction between the business and the owner. The sole proprietor is entitled to all profits and is responsible for all the business’s debts, losses and liabilities.

 

How is a sole proprietorship formed?

 

  • No formal action is necessary to form a sole proprietorship. As long as the sole proprietor is the only owner, this status automatically comes from her or his business activities. However, like all businesses, sole proprietors need to obtain the necessary licenses and permits. Regulations vary by industry, state and locality. 

 

  • If a sole proprietor chooses to operate under a name different than the name of the owner, then she or he may have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"). A sole proprietor must choose an original name; it cannot already be claimed by another business.

 

How is Sole Proprietor taxed?

 

Because the sole proprietor and her or his business are one and the same, the business itself is not taxed separately-the sole proprietorship income is the owner’s income. A sole proprietor reports income and/or losses and expenses with a Schedule C and the standard Form 1040 (US Individual Tax Return). The “bottom-line amount” from Schedule C transfers to the sole proprietor’s personal tax return. It is the sole proprietor’s responsibility to withhold and pay all income taxes, including self-employment taxes and estimated taxes. 

 

What are advantages of a Sole Proprietorship?

 

  • Easy and Inexpensive to Form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.

 

  • Complete Control. Because a sole proprietor is the sole owner of the business, she or he has complete control over all decisions. A sole proprietor is not required to consult with anyone else with regard to business decisions.

 

  • Easy Tax Preparation. A sole proprietor’s business is not taxed separately from the sole proprietor personally, so it is easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.

 

What are disadvantages of a Sole Proprietorship?

 

  • Unlimited Personal Liability. Because there is no legal separation between a sole proprietor and the business, a sole proprietor can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.

 

  • Hard to Raise Capital. Sole proprietors often face challenges when trying to raise capital for their business. Because a sole proprietor cannot sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.

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