What is sole proprietorship? Sole proprietorship is an unincorporated business owned by one person. The law sees you and your business as one entity.
Suitability for Certain Businesses
Retail activities like selling grocery, household goods, merchandise, electric goods, etc. can be carried on at minimal risk by a proprietor. Initial capital needs are less.
Taxation
A sole proprietorship is taxed like regular income. You pay income and self-employment tax on your earnings. The federal tax rate is 10-37% based on earnings amount. The self-employment tax rate is 15.3% up to $142,800 in net sales per year.
Ownership and Sale
A sole proprietor owns an unincorporated business themselves. It’s the simplest business structure. If you’ve built a successful sole proprietorship, selling it can be profitable. This allows the sole proprietor to sell his 100 percent stake in the business in one bulk transaction. The law says a sole proprietorship does not survive you. This means the company cannot keep operating under its original name and cannot be inherited.
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Operational Flexibility
The law says a sole proprietorship does not survive you. When a sole proprietor dies, all of his assets and liabilities become part of his estate, including the assets and liabilities generated from the business activity.
Tax Reporting
As a sole proprietor, you’ll report your business income and expenses on the Schedule C form of your personal income tax return. You’ll pay federal and state income tax on your business profits, and you’ll also pay self-employment taxes.
Operating Multiple Businesses
Own more than one sole proprietorship (though you’ll have to report earnings and expenses on separate Schedule Cs).
Understanding how taxes work is crucial to minimizing the amount you pay. If you earn any money outside of being an employee or investment income, you are a sole proprietor by default. This includes freelancers, independent contractors, influencers, Uber and Lyft drivers, and anyone who earns money independently from an employer. You’ll probably need a seller’s permit if you sell goods that are subject to sales tax.
The sole proprietor is responsible for all business operations and management. If their business is sued, personal assets like their home, credit score, and savings are unprotected.
A sole proprietorship doesn’t need much in terms of paperwork. You can get an employer identification number (EIN) from the IRS to avoid sharing your SSN (Social Security number) with clients.