The sole proprietor is an unincorporated business with one owner who pays personal income tax on profits from the business. With little government regulation, they are the simplest business to set up or take apart, making them popular among individual self-contractors or business owners. Many sole proprietors do business under their own names because creating a separate business or trade name isn’t necessary. Sole proprietorship is also known as “proprietorship”.
There is no separate legal entity created by a sole proprietorship, unlike corporations and limited partnerships. Consequently, the sole proprietor is not safe from liabilities incurred by the entity. The debts of the sole proprietorship are also the debts of the owner. However, all profits flow directly to the owner of a sole proprietorship.
The benefit of the sole proprietorship is the tax advantage. The disadvantage of a sole proprietorship is obtaining capital funding, specifically through established channels, such as equity (selling shares) and obtaining bank loans or lines of credit. As a business grows it often transitions to a limited liability company (LLC) or S Corporation.
Ease of Formation Prospective business owners need not file any special forms with state, local or federal agencies to start a sole proprietorship. When registering the new business, as is necessary for all new businesses, the owner must state that he plans to run a sole proprietorship. This requires no special fees. Some states require the owner register a DBA–doing business as–document with the office of secretary of state. Control Sole proprietors have full discretionary control over operations and business decisions. They decide when to hire employees, what to pay them about minimum wage and when to let them go. The business owner controls all financial decisions associated with the business and receives all of the business profit. He decides how or if to save or reinvest the money. The owner can choose to close, sell or transfer ownership at any time.
Sole proprietorships owners file a one or two page form with the Internal Revenue Service called a Schedule C along with their personal income tax return. This schedule requires a simple listing of revenues and expenses. The owner may deduct automobile, office and other expenses from his income tax return under the supervision of a certified tax professional.
Personal Responsibility for Business Debts
Creditors can hold owners of sole proprietorships legally responsible for debts associated with the business. In addition, business related debts incurred by employees become the responsibility of the owner. Creditors may seize the owner’s home or other personal possessions as remedy for a defaulted loan. Those planning on starting a high- to medium-risk business may want to opt for a limited liability corporation or partnership structure. With this structure, business owners keep their personal property separate and it cannot be seized in the event of a business failure.