A proprietor check is often used by a sole proprietor. A business owned and operated by an individual is referred to as a sole proprietorship. The individual and the business are considered to be one and the same in a sole proprietorship. There is no formal paperwork to be completed at formation because it is only a description of the type of business and not a legal entity.

What Is a Sole Proprietorship?

When an individual decides to sell merchandise or services, a sole proprietorship is immediately established, thus making this type of business a top choice for entrepreneurs. Some examples of sole proprietorships include businesses that provide:

  • Independent graphic design.
  • Personal chef services.
  • Snow plowing services.

Even though there is no formal paperwork initially required to establish a sole proprietorship, depending on your location, and the merchandise and services being offered, sole proprietors may have to acquire permits or business license before operating. Revenue that is earned through your business will be considered personal income, and you will have to pay personal taxes on this revenue.

Choosing a Business Name

As a sole proprietor, you have the freedom to choose the name that you wish to operate under. A Doing Business As (DBA) form can be filed if you wish to name your business something other than your legal name. You must choose a name that is not being used or claimed by someone else. You should verify this information before filing your DBA with your state or county.

Benefits of Being a Sole Proprietor

There are many advantages to operating a business as a sole proprietor. In addition to easy start up and complete control, the IRS will only require you to complete Schedule C form and form 1040 each year, along with the SE for your required self-employment taxes. Sole proprietors have the benefit of incurring the lowest tax rates among businesses.

Downsides to a Sole Proprietorship

On the contrary, as a sole proprietor, you are held personally liable for how your business operates and this puts you at risk of potential lawsuits. A lawsuit could cause immense hardship and seriously damage your financial health. It is not uncommon for sole proprietors to seek a personal loan for business purposes since it is somewhat difficult to attract investors. While you may qualify for a business loan, it is important to consider the fact, that if the business fails, you are held personally liable to pay any debts related to your business.

Becoming a Corporation

In hopes that your business is successful and experiences growth, there may be a point in time that you might consider establishing either an S corporation or a limited liability corporation, which would offer you more legal protection. To be a sole proprietor you must be the sole owner of a business that has not been incorporated. In other words, if you are doing business and have never formally registered your business structure, you are considered to be a sole proprietor.

Sole proprietors should record income and expenses separately from their personal income and expenses, regardless of whether or not the business is operating under the owner's name or under a DBA name.

There were 23 million sole proprietorships in the United States in the year 2014, and the most common form of business, according to the Tax Foundation.

Responsibilities of a Sole Proprietor

It is up to the sole proprietor to pay self-employment taxes, which essentially, is contributions to Social Security and Medicare. While you will have to report business income on your taxes, the business itself is not taxed separately from your personal income. This is what the IRS refers to as pass-through taxation, because your profits pass through the business you operate as a sole proprietor, to be taxed on your personal tax return.

You will file your tax return on a Schedule C form, and the business profits and losses will return to your personal income on form 1040. A sole proprietor is the business owner, so they are not considered to be an employee of the business. While they may receive income from the business, they do not receive a paycheck or will not report a salary on the Schedule C tax form.

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