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Of all business forms, the sole proprietorship is the simplest and least expensive to run. It's often used to start a small business. Usually, the business belongs to a single owner (the "sole proprietor"). Sometimes it's run by a married couple.
Odds are you've done business with a sole proprietorship many times. In fact, if your small business is already up and running, you might be operating as a sole proprietorship. If you haven't formed a corporation or limited liability company you're operating as a sole proprietorship as soon as you start to sell goods or services.
Some things can complicate the formation of a sole proprietorship. The sole proprietorship has some serious handicaps. If you're thinking of creating a sole proprietorship for your small business, or if you're already operating as one, here are some issues to consider.
Forming a Sole Proprietorship
You, as sole proprietor can do business under you own name, for example, "Jane Jones." You can also use a trade name, like "Jane's Jet Skis" or "Supreme Skis." These are also called a "fictitious name" or a "DBA," which stands for "doing business as."
DBAs, fictitious or trade names must be registered with the county (or sometimes the city) where your business is located.
Like any other business, a sole proprietor must get any business permits or licenses the state and local governments require. 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.
A sole proprietorship can have employees. Your spouse can also work for you on an occasional basis, and you don't have to formally hire him or her as an employee.
How a Sole Proprietorship Works
It's very simple: You are the business. You're entitled to all the profits. You're also personally liable for all obligations of the business. This includes debts incurred in the operation of the business. It also includes the negligent or willful acts of your employees. This makes a sole proprietorship a big financial risk.
If you or an employee negligently injures someone while on the job, you are personally liable for the victim's damages. If you have no insurance to cover the victim's damages, the victim will try to claim your personal assets for payment. This includes everything you own or have any ownership interest in. Even joint accounts you have with others aren't safe.
Also, if the business is unsuccessful and you close it, you'll be personally liable for payment of all business debts. Think of 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 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
As sole proprietor, you'll report your business income or losses on your individual tax return. You use Form 1040, Schedule C for this. As you go through your tax year, you should pay estimated taxes quarterly.
You'll probably have to pay self-employment taxes. This is the same as paying Social Security and Medicare taxes by and for employees.
It's critical that you keep accurate records on the sole proprietorship's income and expenses. It also makes accounting easier if you set up separate accounts for your business. Don't run your business out of your personal bank accounts and credit lines.
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?
Related Resources on Lawyers.comsm
- Contact a Business Law Lawyer in your area for specific legal advice, and read about Business: Selecting a Good Lawyer and Business: Preparing to Meet with a Lawyer
- Need a form? Access hundreds of Business Legal Forms, including a Business Fact Sheet
- Read Corporations: The Basics and Partnerships, or access more Business Law articles and information
- Legal Dictionary
- Visit the Legal Forums for discussions on Business Law topics