Sole Proprietorship
A sole proprietorship is a business owned and managed by one individual who is personally liable for all business debts and obligations.
Sole proprietorships are the most common – and simplest – form of business organization. Sole proprietorships are owned by one person who is generally also responsible for the business’s day-to-day operational responsibilities. Sole proprietors operate in many different capacities, including full and part-time businesses, individually run businesses or those with employees, and traditional, home-based, or online businesses in all different industries. Sole proprietors own all assets and profits of the business and also assume complete responsibility for business liabilities and debts.
Forming a Sole Proprietorship
Unlike other business structures, when forming a sole proprietorship, you do not need to register your business with the state. Starting a sole proprietorship is often as simple as selecting a business name and obtaining appropriate licenses and permits. Check with your state business entity registration office to be sure that you’ve satisfied all local requirements.
Many states require a sole proprietor to operate under their personal name unless they formally file a trade name, or a "Doing Business As" (DBA) name.
Next, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool on sbcacommunity.com to find a listing of federal, state and local permits, licenses, and registrations you’ll need to run a business.
If you are hiring employees, read more about federal and state regulations for employers.
How Sole Proprietorships are Taxed
Most businesses will need to register with the IRS and state and local revenue agencies, and receive a tax ID number or permit.
Sole proprietors file their business taxes on their personal income tax returns. When filing, owners must clearly keep personal and businesses finances separate. Since the two are so closely intertwined, this is often difficult, but it’s important for all sole proprietors to maintain accurate business records.
Tax Forms for Sole Proprietors:
Sole proprietors file Schedule C or Schedule C-EZ, Profit or Loss from Business, with their Form 2020.
In some cases, additional forms are required for sole proprietors:
- Self-Employment Tax – For individuals who work for themselves, this includes a social security and Medicare tax. The IRS Guide to Self-Employment Tax has more information on paying this tax.
- Estimated Tax – Used to pay tax on income that is not subject to withholding. Sole proprietors generally must pay estimated taxes for $2020 or more when filing their return. The IRS Guide to Estimated Taxes has more information on calculating and completing these forms.
The IRS guide to Federal Tax forms for Sole Proprietorships provides these forms and instructions regarding their use.
Advantages of a Sole Proprietorship
Easy and Inexpensive. For inexperienced entrepreneurs, sole proprietorships are a practical incorporation option – they are generally the least expensive and simplest business structure. Similarly, they are also easy to dissolve if the business does not go as planned.
Control of Operations. Sole proprietors are in complete control of their business. Within the parameters of business laws and regulations, owners have the right to make all operating decisions regarding their business as they see fit..
Receive and Allocate Income. All income generated by a sole proprietorship is received by the owner to keep or reinvest according to their discretion.
Disadvantages of a Sole Proprietorship
Unlimited Liability. With the privilege of total control, sole proprietors also assume liability. Owners are legally responsible for their business’s financial obligations, meaning your personal assets can be used to help satisfy debt incurred by the business.
Funding Difficulties. Sole proprietorships are often at a disadvantage when it comes to raising capital. Because sole proprietorships tend to start small and can be relatively unstable, investors are typically not drawn to them. Start-up capital is often limited to a combination of personal assets and loans.
Attracting Employees. Sole proprietorships tends to be less attractive to prospective employees because they generally do not offer as many employment benefits. There is also no chance of ownership potential, which may turn off driven workers.
