Sole Proprietorship

Sherrie Bennett

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The sole proprietorship is the simplest and most common form of business, conducted by a single individual owner (the "sole proprietor"). Sole proprietors can conduct business under their own name by simply doing business, for example, as "Jane Jones." A sole proprietor can also do business under a trade name (sometimes called a "fictitious name") as "Jane's Jet Skis" or "Supreme Skis."

If a sole proprietor operates under a trade name or fictitious name, the sole proprietor is usually required to file a form (a "trade name certificate") in the city, county or state where the business is located.

A sole proprietorship may have employees and is permitted to carry on most types of businesses.

Advantages

• A sole proprietorship is simple to start and doesn't have the operating expenses of other legal entities (for example financing for a sole proprietorship. In making a decision to extend credit, a bank or other source will look at the net worth and individual credit history of only the sole proprietor.
• Raising capital to start or expand the business is limited, as a practical matter, to what is called "debt financing" (that is, loans). A sole proprietorship has only one owner and, as a result, cannot sell "equity interests" (stock or partnership interests) as is typically done by corporations and other forms of business.
• A sole proprietorship is a greater financial risk, because you're personally liable for all obligations of the business, including debts incurred in the operation of the business. The liabilities of a sole proprietor include liability for the negligent or willful acts of employees and agents. Therefore, if an employee negligently injures someone in the course of the employee's duties, you may be personally liable for damages. If you have no insurance or insufficient insurance to cover the damages, your other assets (home, car, or stock portfolio) could be seized to pay the damages.
• If the business is unsuccessful and is terminated, you'll be personally liable for payment of all business debts, such as bank loans and unpaid bills to vendors and service providers (accountants, consultants and attorneys). If your assets aren't enough to satisfy the outstanding business debts, you may be forced to declare personal bankruptcy.
• Legally, a sole proprietorship is connected only with the sole proprietor. So if you die, the business enterprise terminates, leaving only the assets of the business, such as equipment, accounts receivable, and real property. Because the assets used in the business are not separated from your other assets, it may be hard to sell the business as a whole after your death. If there are disputes among your heirs, selling the business assets can be particularly troublesome.

Tax Treatment of Sole Proprietorships

Any income that is earned from the business is considered your income. The sole proprietorship itself is not separately taxed on its income. Instead, the sole proprietor reports business income and expenses on his or her own tax return. This means that the net income from the business is taxed only once. In contrast, the income from a corporation is taxed twice: once when the corporation is taxed, and again when the income is distributed to shareholders in the form of dividends.

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