Sole Proprietorship Text Size:

The sole proprietorship is a simple, informal structure that is inexpensive to form. Usually, the business is owned and operated by a single individual owner (the "sole proprietor"), or sometimes it's run by a married couple.

Odds are that you've done business with a sole proprietorship many times, and you may not have even known it. In fact, if your small business is already up and running, you might be operating as a sole proprietorship: as soon as you start to sell goods and services, and you haven't registered as a corporation or limited liability company, then you're operating as a sole proprietorship.

As simple as it might seem, there are some things that can complicate the formation of a sole proprietorship, and there are some serious disadvantages to using this form of business. So, if you're thinking of creating a sole proprietorship for your small business, or if you think you're already operating as one, there are some issues you should be aware of.

Forming a Sole Proprietorship

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" or "trade name" or "DBA," which stands for "doing business as") like "Jane's Jet Skis" or "Supreme Skis."

If you plan on using a fictitious or trade name, then you'll have to file or "register" that name with the county (or sometimes the city) where your business is located.

A sole proprietorship can have employees, and your spouse can work for you on an occasional basis, and you don't have to formally hire him or her as an employee.

Other than filing a fictitious name, the only other paperwork that needs to be completed and filed is your application for the necessary business permits or licenses that you need to conduct your particular type of business. You need to check the state and local laws where your business is located for licensing and permit requirements, or get some help from an experienced business law attorney.

How a Sole Proprietorship Works

A sole proprietorship is a big financial risk because you're personally liable for all obligations of the business, including debts incurred in the operation of the business, as well as for the negligent or willful acts of your employees.

So, for example, if you or an employee negligently injures someone while on the job, you can be personally liable for the victim's damages: if you have no insurance (or not enough insurance) to cover the victim's damages, he or she can go after your personal assets; your home, car, or stock portfolio; for payment.

Also, if the business is unsuccessful and you close it, 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.

Because a sole proprietorship is connected only with you, the sole proprietor, the business ends when you die. Business assets, like equipment, accounts receivable, and real property, and business debts become part of your estate.

Tax Treatment of Sole Proprietorships

Any income that is earned from the sole proprietorship is considered your income. As sole proprietor, you'll have to report your business income and expenses on your individual tax return. Because there's no employer withholding taxes for you, you'll probably have to pay estimated taxes throughout the year.

In addition, you'll probably have to pay self-employment taxes, which are designed to cover the Social Security and Medicare taxes that most employers and employees pay.

It's critical that you keep accurate records on the sole proprietorship's income and expenses, and it's a good idea to keep your personal assets (like your checking and savings accounts) separate from the business assets.

Questions for Your Attorney

• How much does it cost to start a sole proprietorship with a fictitious name?
• Can I use a DBA name that's being used by another company that sells a different product?
• My employee was in a car accident while he was driving a delivery truck that's owned by my sole proprietorship, and the other driver was hurt. If the other driver sues me, can I sue my employee for any money that I have to pay to the accident victim?

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