A sole proprietorship is a business owned and run by one person. There is no legal distinction between the business and the owner, who is liable for all debts and losses. Sole proprietorships are popular due to their simplicity in formation and dissolution.
Tax Obligations and Liability
The sole proprietor pays personal income tax on all profits. They also pay self-employment taxes. Sole proprietorships are considered unincorporated, unlike LLCs or S-corps.
Typically, only one owner runs a sole proprietorship, although sometimes spouses jointly own one. Sole proprietors may use a fictitious business name, but even then there is no separate legal entity.
The owner’s personal assets can be pursued for business debts and liabilities. The owner uses their SSN as the business EIN. Fictitious names must be registered locally.
Formation and Business Structure
Sole proprietorships have simple startup requirements, making them a common choice for a first business structure. An example is Jane’s beauty supply store.
Sole proprietors must file taxes quarterly and annually. This structure suits low-risk businesses with low startup costs. The owner has full control and ownership, allowing quick decisions. Formation requires little paperwork, making it an affordable option for entrepreneurs.
Overall, the simplicity and autonomy make sole proprietorships a well-regarded choice for new business owners. The owner bears risks but also gains from profits and assets. Easy formation and maintenance can balance the challenge of unlimited liability.