A sole proprietorship is the simplest way for an individual to open a business. There are two main distinctions between a sole proprietorship and other business structures: ownership and taxation. Additionally, this type of business structure does not have the distinction of being a separate entity from its owner.
Ownership Requirement of a Sole Proprietorship
A sole proprietorship is owned by the individual who started the business. There are no partners, shareholders, or other interests in the business. This type of business can operate under the owners’ legal name or through use of a fictitious name. Fictitious names must be registered with the appropriate agencies of the state.
Because the business, through the eyes of the law, is seen as the same entity as the owner, all liability falls upon the business owner. If the business is sued, the owner will be held directly responsible for the damages. This also means that the owner’s personal assets may be at risk in the event of a debt or a claim.
Sole proprietors are not required to pay unemployment insurance or purchase workers compensation policies on themselves. However, if employees are hired, both of these requirements must be met.
This popular business structure allows business owners to sign contracts in their own names, establish lines of credit for the business using their own credit history, and does not require board meetings or board approval for any actions taken within the company.
Taxation Requirements on a Sole Proprietorship
One drawback to having a sole proprietorship is taxes. Sole proprietorships are taxed at personal income levels instead of at the lower corporate rate. Individuals must claim all of their business income and losses using the appropriate 1040 form and attachments. This often leads to a higher tax rate.
Because the money and other assets of a sole proprietorship are often intertwined into the personal money and assets of the owner, taxing authorities typically have the right to access personal monies to pay for unpaid tax debts.
Formation of a Sole Proprietorship
Sole proprietorships are very easy to form. You will need to file for the appropriate licensing (if required for your enterprise) in your area, prepare a fictitious name form if necessary, and establish a place to conduct business. Once these tasks have been completed, business can begin.
Sole proprietorships can also close at will. There are no legal requirements for closing this type of business. However, creditors can still attach debts from the business against the proprietor’s personal credit record after the business is closed because, legally, the owner and the business are viewed as one and the same.