What is a Sole Proprietorship?

What is a sole proprietorship? A sole proprietorship, also known as a sole trader or a proprietorship, is defined as an unincorporated business which has no separate legal existence from its single owner. In its modest form, a sole proprietorship is just a one-person business that does not have to be registered with the state, as compared to a limited liability company (LLC) or a corporation.

People can automatically set up a sole proprietorship, even without paperwork. The sole proprietorship is the easiest form of business under which one can operate, particularly from a tax and accounting perspective.

The business under the sole proprietorship refers to a person who owns the business and is personally accountable for its debts. One can operate a sole proprietorship business under the owner's name or do business under a fictitious name. The fictitious name is the trade name of the business and does not create a separate legal entity from the sole proprietor. No paperwork filing is needed if the owner uses his or her personal name, but may need to file papers to indicate that the owner is "Doing Business As…," which is also known as a DBA form.

Due to simplicity, ease of setup, and nominal cost, the sole proprietorship became a popular business among individual self-contractors, consultants, and small-business owners. The owner of the sole proprietorship business may only need to register his or her name and secure local licenses, and the owner will be set up for business.

As there is no separate entity under the law for a sole proprietorship business, contracts are normally signed by owner under his or her personal name. Even if the business uses a fictitious name, the owner will usually have his or her name written down in the checks issued by the clients.

Under normal circumstances:

  • Owners of the sole proprietor business combine personal and business property and funds.
  • The business under the sole proprietorship usually has the bank accounts under the name of the owner.
  • The name of the sole proprietor owner can be used for lawsuits, either sue or be sued for the business.
  • When the sole proprietorship earns an income, the owner technically earns the income.

The sole proprietor needs to report the sole proprietorship income and/or losses and expenses by filing a Schedule C, along with the standard Form 1040. The profits and losses are initially recorded on a tax form called Schedule C, which is filed along with the 1040. Afterward, the "bottom-line amount" from Schedule C is moved to the personal tax return of the owner, which is appealing since the business losses an owner could suffer could offset income earned from other sources.

As a sole proprietor, you must also file a Schedule SE with Form 1040. Owners use a Schedule SE to calculate how much self-employment tax the owners owe. The sole proprietor would not be able to enjoy unemployment benefits in case the business suffers.

One should cautiously consider different scenarios before choosing sole proprietorship as form of business because businesses could go out of business and accidents do really happen. The unfortunate circumstances may instantly become a terrible misfortune for the sole proprietor owner.

Advantages of a Sole Proprietorship

A sole proprietorship can be established quickly, easily and inexpensively. Sole proprietors do not need to pay unemployment tax on themselves, yet, sole proprietors do need to pay unemployment tax on any employees of the business.

A sole proprietor does not need to file a separate business tax return as all profits generated from the business is reported on the personal tax return. The same with other business forms, travel expenses in relation to business, automobile expenses, advertising can be deducted from income tax, as well as a part of the owner's home expenses if the business is home-based.

As the sole owner of the business, you get to make all the decisions for the business, and you don't need to hold business formalities such as shareholder meetings or take votes on any management issues.

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