Description of a Sole Proprietorship: A sole proprietorship is a business that is simply owned and operated by a single person. A sole proprietorship is not incorporated. The owner and the business are deemed to be the same person under the law. The owner of the business, or owner of the sole proprietorship, receives all profits, if any, from the business. Although the sole proprietorship is an easy and inexpensive way to start a business, the owner does except all risk for the business. The owner is responsible for all debts, liabilities, and losses of the business. This law firm strongly encourages business owners to avoid operating a business as a sole proprietor because if the business fails, the creditors can come after the business owner for the debts. A sole proprietor could loss personal assets to cover the debts of the company, including their home, money in banks, and garnishments against pay checks.
FORMING A SOLE PROPRIETORSHIP
An owner of a sole proprietorship does not have to take any formal action to be a business owner or a sole proprietor. Merely operating a business as an individual person without creating a formal business entity makes a person a sole proprietor. If a person elects to open a lawn mowing business to earn some extra cash, that person is acting in the capacity of a sole proprietor.
However, a sole proprietor would still need to comply with licensing requirements. For example, a contractor that is remodeling a bathroom may still need to possess a contractor’s license and obtain building permits when required for certain work. Different industries may have different regulatory agencies and regulations that need to be followed, which could be federal, state and local.
Many sole proprietors want to operate under a company name. The sole proprietor should create a DBA (doing business as), a trade name, or fictitious name.
SOLE PROPRIETOR TAXES
Income from a sole proprietorship is not taxed at the business level. The income is deemed income of the individual and the individual pays taxes as simple income taxes. The sole proprietor is able to deduct expenses related to the business.