What is a Proprietorship?

Do you know what a proprietorship is? A proprietor is an owner of any business establishment, regardless of the type of business it is—be it a bookstore, pizza place, or contracting business. Proprietorship is thus the same as ownership when it comes to a business. Are you a proprietor? Are you considering becoming one? Regardless of where you are on your journey, it's important to understand the subtle nuances of having and operating a sole proprietorship.

Proprietorship Registration

Before any business can begin, it must first be registered. To register as a proprietorship, your business must be a small business that is expected to stay approximately the same size throughout its lifetime, and which is also not expected to last as long as a corporation.

About Sole Proprietorship

Also called a sole trader or a proprietorship, Sole Proprietorship is a business that is not incorporated and that is also not legally separated from its owner. In the United States, despite the fact that it does not offer limited liability, sole proprietorships are the most highly used legal structures for businesses.

A sole proprietorship is a business that is owned by only one person, and which does not have to be registered with the state, which is quite unlike an LLC or corporation which does. Anyone can establish a sole proprietorship, and in many cases it doesn’t even involve any paperwork. It’s definitely, as far as businesses go, probably the easiest one to run and operate, especially when doing its taxes and balancing its books. Unlike an LLC, should a sole proprietorship fall into debt it is the owner’s responsibility to settle them.

The business owner doesn’t have to operate his or her business under his or her own name. If they want, they can create a new name that then becomes the name of the business. When this happens, though, the fictitious ‘identity’ is still not separate from the sole proprietor, and is not a legal loophole the owner can utilize so that he or she won’t be liable.

All that is really needed is to register his or name with the state and county, and get any licenses that may be needed (depending on the type of business).  After that, the owner is then ready for business.

The owner is not separated from his or her business. The two are legally linked. When checks are written out to the owner, even if they are written out to a fictitious name, the money will go to the owner’s bank account. Generally, sole proprietors combine business with personal properties and money. This, in contrast, is something that LLCs and corporations can’t do.

Sole proprietors can be sued for things that happen at his or her business. Because of this liability, businesses that begin as sole proprietorships will usually opt to a different legal structure once more money begins to come and the business takes root. Most in these situations tend to transition to either an LLC or S-corporation.

Also worth noting is that whenever the business takes in a profit or loss, so too does the owner. Whether he or she takes in money or not, the income must be reported on tax form ‘schedule C,’ a form that should be filed with a 1040. After this is done, the ‘bottom-line amount’ is reported on the owner’s personal tax return. Owners need to also file a ‘Schedule SE’ with their 1040, which calculates how much self-employment tax they need to pay quarterly.

In addition to paying income taxes, businesses need to pay sales taxes on any goods that are taxable, plus property taxes on any land the business operates from. Should the business tank and go under, sole proprietors are not able to collect any unemployment checks from the government. It is suggested that anyone considering starting a sole proprietorship know what could happen to them should anything bad happen. True, there is no reward without risk, but being completely liable for a business that may not do well may be cause enough to rethink one’s game plan.

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