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ENTREPRENEUR RESOURCE CENTER
Business Legal Structure: Sole Proprietorship
Sole Proprietorship is a form of business which owned and managed by one person. This is the most popular form of business ownership. Approximately 65 percent of all business are proprietorship.
The advantages of a sole proprietorship.
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It is fast and simple to begin operations as a sole proprietorship. |
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It is the least expensive form of ownership to establish. There are no lengthy legal papers to fill as the owner usually just goes to the local government to obtain the licenses. |
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The tax aspects of a sole proprietorship are appealing because income and expenses from the business are included on your personal income tax return (Form 1040). Your profits and losses are first recorded on a tax form called Schedule C, which is filed along with your 1040. Then the "bottom-line amount" from Schedule C is transferred to your personal tax return. This aspect is attractive because business losses you suffer may offset income earned from other sources. As a sole proprietor, you must also file a Schedule SE with Form 1040. You use Schedule SE to calculate how much self-employment tax you owe. |
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In addition to paying annual self-employment taxes, you must also make quarterly estimated tax payments on your income. Currently, self-employed individuals with net earnings of $400 or more must make estimated tax payments to cover their tax liability. If your prior year's adjusted gross income is less than $150,000, your estimated tax payments must be at least 90 percent of your current year's tax liability or 100 percent of the past year's liability, whichever is less. |
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The federal government permits you to pay estimated taxes in four equal amounts throughout the year on the 15th of April, June, September and January. |
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With a sole proprietorship, your business earnings are taxed only once, unlike other business structures. |
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No legal requirements to start or discontinue the business. |
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You have complete control of your business as you make all the decisions and get all the profits. |
The disadvantages of a sole proprietorship.
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Selecting the sole proprietorship business structure means you are personally liable for your company's liabilities. As a result, you are placing your own assets at risk, and they could be seized to satisfy a business debt or legal claim filed against you. |
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Limited skills and capabilities of the owner to conduct the business. |
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Raising money for a sole proprietorship can also be difficult. Banks and other financing sources are reluctant to make business loans to sole proprietorships. In most cases, you will have to depend on your own financing sources, such as savings, home equity or family loans. |
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Lack of continuity of business. Because of the lack of a successor, the business will be terminated if the owner dies or becomes incapacitated. |
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