Sole Proprietor Overview

A Sole Proprietorship is the oldest and simplest way to conduct business. It is an unincorporated business owned by a single individual (the sole proprietor), with basically no separation between the individual and the business in terms of financial and legal obligations—sometimes referred to as the “same entity” concept. In other words, in a sole proprietorship, the income and expenses of the business are recorded on the owner’s individual tax returns. The sole proprietor is also responsible for business-related withholding taxes, such as social security and Medicare.

A sole proprietorship is typically not required to file forms or to formally register with a state. However, a sole proprietorship must follow relevant business regulations, such as obtaining a business license or tax registration certificate, an employee identification number from the IRS if you have employees, a seller’s license, or a zoning permit, depending on the type of business that the sole proprietorship operates.

Sole Proprietor Frequently Asked Questions

What are the advantages to operating as a Sole Proprietorship?

Operating as a Sole Proprietorship has the following advantages: 1. It is the easiest type of business organization to manage, as there are no formal requirements for starting, or dissolving, a sole proprietorship. 2. Since there is only one owner, decision-making can be more efficient and quick, as there is no need to consult other owners. 3. Minimal start-up costs.

What are the disadvantages to operating as a Sole Proprietorship?

A sole proprietorship is likely to have a difficult time raising external financing for its operations, since there are no shares of the business to be sold. Bank financing may also be difficult to obtain if the owner’s personal assets, which would be put up as collateral, are not significant. In addition, since this type of business has unlimited liability, if the business is sued the owner is personally liable. The assets of both the business and the owner (such as an owned house, cash in the bank, or other property) would be subject to claims by creditors.

Is it harder for my business to grow as a Sole Proprietorship?

Hiring employees may be difficult for a sole proprietorship, which may hinder growth prospects. If the business does grow or become more successful, business risks tend to grow. In such a case, the proprietor may opt to form an LLC or another corporate form, limiting some of his or her personal liability.

When must I register my Sole Proprietorship business name?

If you operate a sole proprietorship yet conduct business under a name different from your own, states typically require you to register your business name. This name is known as a fictitious business name.

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Other Sole Proprietor Information Sources

Sole Proprietor Tax Information
Source: IRS.gov
URL: http://www.irs.gov/businesses/small/article/0,,id=98202,00.html

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