Start Up Tip: Forming a Sole Proprietorship

A sole proprietorship is the simplest and most common structure to choose when starting a business. It is an unincorporated business owned and operated by one individual with no distinction between the business and you – the owner. As owner, you are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

Forming a Sole Proprietorship

No formal action is needed to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities. For example, if you are a freelancer writer, then you are a sole proprietor.

But like all businesses, you need to obtain the appropriate licenses and permits. Regulations vary by industry, state and locality. Use the Licensing and Permits Tool on the Small Business Administration website to find a listing of federal, state and local permits, licenses and registrations you will need to run your business.

If you choose to operate under a name other than your own, you will most likely have to file a fictitious name, such as an assumed name, a trade name or a DBA (“doing business as”) name. It must be an original name; you cannot use a name that is already claimed by another business.

Sole Proprietor Taxes

Because you and your business are considered one and the same, the business itself is not taxed separately meaning the sole proprietorship income is your income. You report income and/or losses and expenses for your business using a Schedule C and the standard Form 1040. The “bottom-line amount” from Schedule C transfers to your personal tax return. It’s your responsibility to withhold and pay all income taxes, including self-employment and estimated taxes.

Advantages of a Sole Proprietorship

• Easy and inexpensive to form: It’s the simplest and least expensive business structure to establish. Costs are limited to obtaining the necessary license or permits.

• Complete control: As the sole owner of the business, you have complete control over all business decisions. You don’t have to consult with anyone when you need to make decisions or want to make changes.

• Easy tax preparation: Since your business is not taxed separately, it’s easy to file taxes for a sole proprietorship and the tax rates are the lowest of the business structures.

Disadvantages of a Proprietorship

• Unlimited personal liability: Since there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business, including any liabilities incurred as a result of an employee’s actions.

• Hard to raise money: Since you can’t sell stock in your business, investors will be reluctant to invest. Also, banks are hesitant to lend money for a sole proprietorship due to a perceived lack of credibility regarding repayment should the business fail.

• Heavy burden: Having complete control in your business can be stressful since you alone are ultimately responsible for your business succeeding or failing.