What Is a Sole Proprietorship?

A sole proprietorship is an unincorporated business with one owner. There is no legal separation between the company and the owner, who receives all profits but is liable for all debts and losses. A sole proprietorship is the easiest type to establish and a popular choice for 澳洲幸运5官方开奖结果体彩网:small businesses, individual contractors, and consultants. Most small businesses start as sole proprietorships and either stay that way or expand and transition to a 澳洲幸运5官方开奖结果体彩网:limited liability entity or 澳洲幸运5官方开奖结果体彩网:corporation.

Establishing a Sole Proprietorship

The easiest way to start a one-owner business is through a sole proprietorship. The debts of tℱhe sole proprietorship are also the debts of the owner. However, all profits flow directly to the business owner. There are certain s💦teps individuals should take to get started including:

• Some states require that individuals apply for business or occupancy licenses and permits.
• States may also require businesses to file a "Doing Business As name" or operate under an assumed name, usually the sole proprietor.
• Apply for and obtain an 澳洲幸运5官方开奖结果体彩网:E🌸mployer Iden🥂tification Number (EIN) for employees or to file tax returns. Some sole proprietors can use their own Social Security Number (SSN). Owners may want to check with a 澳洲幸运5官方开奖结果体彩网:tax advisor to determine which works best.
• To sell taxable products, businesses must register for a sales tax license with their state.

Sole Proprietorship vs. LLC vs. Partnership

A sole proprietorship is very different from a corporation, a 澳洲幸运5官方开奖结果体彩网:limited liability company (LLC), or a 澳洲幸运5官方开奖结果体彩网:limited liabilitꦇy partnership (LLP), in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

When a sole proprietor seeks to incorporate a business, the 澳洲幸运5官方开奖结果体彩网:owne𓃲r usually restructures it into an LLC. For this to work, the owner must first determine that the company name is available. If the desired name is free, 澳洲幸运5官方开奖结果体彩网:articles of organization must be filed with the state office where the business will be based. The business owner must create an LLC operating agreement defining the business structure. Finally, the new company must obtain an EIN from the IRS.

Advantages and Disadvantages

A sole proprietorship requires a limited amount of paperwork to get started. The tax process is simpler because an 澳洲幸运5官方开奖结果体彩网:employe🏅r identifica♌tion number (EIN) from the Internal Revenue Service (IRS) is not required and owners can use their Social Security number (SSN) to pay taxes.Income generated from a pass-through business is only subject to a single layer of income tax and, in some cases, may be eligible for a 20% tax deduction until 2026.

An important downside of a sole proprietorship is that it provides no liability protection to the owner. By contrast, an LLC separates business and personal assets and the owner is protected against creditors seizing their assets, such as their home. This 澳洲幸运5官方开奖结果体彩网:unlimited liability goes beyond the business entity to the owners themselves. Sole proprietorships must rely on standard funding like bank loans or lines of credit. Banks may view a new business with a small balance sheet as a high-risk borrower.

Taxation

The owner of a sole proprietorship pays personal income tax on profits earned from the business. Sole proprietors report their income and expenses on their tax returns and pay income and 澳洲幸运5官方开奖结果体彩网:self-employment taxes on profits. Tax forms include:

The Bottom Line

A sole proprietorship is a straightforward way for an individual to start a business. It does not require registering with a state authority for most situations and does not require obtaining an EIN from the IRS. The benefits of simplicity are accompanied by some drawbacks, including all liabilities passed through from the business to the individual and obtaining funding.