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The vast majority of small businesses start out as sole proprietorships. These businesses are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the eyes of the law and the public, you are one in the same with the business.
Getting Started
Selecting a Name and Beginning
You can start a sole proprietorship simply by beginning to conduct your business. You should open a separate bank account to keep track of your business’s finances and keep records of all of the expenses and revenues connected with running the business.
A sole proprietorship is usually operated under the name of the individual owner, although other names can be used. If the name selected is not yours, you may be required to file a “fictitious name” certificate in the town, city or county in which your business is located. Care should be taken in selecting a name to ensure it is not the same or similar to the name of another business. Also, note that many states prohibit using the words “incorporated,” ‘Inc.,” “Corporation,” “Company” or “Co.” unless your business is a corporation.
Obtaining Permits and Licenses
Many local municipalities require businesses to obtain business licenses or permits, no matter what type of entity is involved. Examples of the licenses often required are business licenses, zoning occupancy permits and tax registrations. You should call local government offices for information and application forms.
Control
Who Owns the Business?
If you create a sole proprietorship, all the assets of the business are owned directly by you. A sole proprietorship may be owned by only one individual–ownership by more than one person creates a partnership.
Who Controls the Business?
Generally, the owner of the sole proprietorship controls the business. If you are the owner of a sole proprietorship, you may hire employees to help you manage the business, but you will have legal responsibility for the decisions made by your employees and ultimate control over the business.
Liability
In a sole proprietorship, the business and the owner are one and the same. There is no separate legal entity and thus no separate legal “person.” This means that as a sole proprietor you will have unlimited personal responsibility for your business’s liabilities. For example, if your business cannot pay for its supplies, the suppliers can sue you individually. The business creditors can go against both the business’s assets and your personal assets, including your bank account, car or house. (However, you may be able to protect your personal assets from business risks by owning them jointly with your spouse or by transferring them to your spouse or children. There may be tax and other reasons why this is not a good idea; seek the advice of a lawyer first.) The reverse is also true; i.e., your personal creditors can make claims against your business’s assets.
Insurance may be purchased to cover many of the risks of running a sole proprietorship. Some businesses are not very risky, so the personal liability may not be a great concern. However, you should understand that if you choose to operate your business as a sole proprietorship and lose money (which insurance will not cover), you will be personally liable for the loss.
Continuity and Transferability
How Long Does a Sole Proprietorship Last?
A sole proprietorship can exist as long as its owner is alive and desires to continue the business. When the owner dies, the sole proprietorship no longer exists. The assets and liabilities of the business become part of the owner’s estate.
Can You Sell Your Business?
A sole proprietor can freely transfer a business by selling all or a portion of the assets of the business.
Taxes
A sole proprietor is taxed on all income from the business at applicable individual tax rates. The business income, and allowable business expenses, is reflected on the individual tax return. No separate income tax return is required of the sole proprietor. However, a proprietor must pay self-employment tax on the business income.
Tax Forms for Sole Proprietorship (only a partial list and some may not apply)
- Individual Income Tax Return Profit or Loss from Business Self-Employment Tax Estimated Tax for Individuals
- Expenses for Business Use of your Home
- Employment Tax Forms
Advantage
- Easiest and least expensive to create
- One person makes all the decisions
- The owner receives all the income from the business
- Profits flow directly to the owner’s personal income tax return
- Easy to dissolve the business
Disadvantages
- Can be difficult to get funding
- Hard to attract high-calibre employees.
- Owner has unlimited liability and is legally responsible for all debts against the business