Sole Proprietorship Basics
If you're going into business on your own, the simplest legal structure is the sole proprietorship.
A sole proprietorship is a business that is
owned by one person (and sometimes his or her spouse) and that isn't
registered with the state as a corporation or a limited liability
Sole proprietorships are so easy to set up
and maintain that you may already own one without knowing it. For
instance, if you are a freelance photographer or writer, a craftsperson
who takes jobs on a contract basis, a salesperson who receives only
commissions or an independent contractor who isn't on an employer's
regular payroll, you are automatically a sole proprietor.
However, even though a sole proprietorship is
the simplest of business structures, you shouldn't fall asleep at the
wheel. You may have to comply with local registration, license or
permit laws to make your business legitimate. And you should look sharp
when it comes to tending your business, because you are personally
responsible for paying both income taxes and business debts.
Personal Liability for Business Debts
A sole proprietor can be held personally
liable for any business-related obligation. This means that if your
business doesn't pay a supplier, defaults on a debt or loses a lawsuit,
the creditor can legally come after your house or other possessions.
Example 1: Lester is the owner of a small
manufacturing business. When business prospects look good, he orders
$50,000 worth of supplies and uses them in creating merchandise.
Unfortunately, there's a sudden drop in demand for his products, and
Lester can't sell the items he's produced. When the company that sold
Lester the supplies demands payment, he can't pay the bill. As sole
proprietor, Lester is personally liable for this business obligation.
This means that the creditor can sue him and go after not only Lester's
business assets, but his other property as well. This can include his
house, his car and his personal bank account.
Example 2: Shirley is the owner of a flower
shop. One day Roger, one of Shirley's employees, is delivering flowers
using a truck owned by business. Roger strikes and seriously injures a
pedestrian. The injured pedestrian sues Roger, claiming that he drove
carelessly and caused the accident. The lawsuit names Shirley as a
co-defendant. After a trial, the jury returns a large verdict against
Roger -- and Shirley as owner of the business. Shirley is personally
liable to the injured pedestrian. This means the pedestrian can go
after all of Shirley's assets, business and personal.
By contrast, the law provides owners of
corporations and limited liability companies (LLCs) with what's called
"limited personal liability" for business obligations. This means that,
unlike sole proprietors and general partners, owners of corporations
and LLCs can normally keep their house, investments and other personal
property even if their business fails. If you will be engaged in a
risky business, you may want to consider forming a corporation or an
Paying Taxes on Business Income
In the eyes of the law, a sole proprietorship
is not legally separate from the person who owns it. The fact that a
sole proprietorship and its owner are one and the same means that a
sole proprietor simply reports all business income or losses on his
individual income tax return - IRS Form 1040 with Schedule C attached.
As a sole proprietor, you'll have to take
responsibility for withholding and paying all income taxes, which an
employer would normally do for you. This means paying a
"self-employment" tax, which consists of contributions to Social
Security and Medicare, and making payments of estimated taxes
throughout the year.
Registering Your Sole Proprietorship
Unlike an LLC or a corporation, you generally
don't have to file any special forms or pay any fees to start working
as a sole proprietor. All you have to do is declare your business to be
a sole proprietorship when you complete the general registration
requirements that apply to all new businesses.
Most cities and many counties require
businesses -- even tiny home-based sole proprietorships -- to register
with them and pay at least a minimum tax. In return, your business will
receive a business license or tax registration certificate. You may
also have to obtain an employer identification number from the IRS, a
seller's permit from your state and a zoning permit from your local
And if you do business under a name different
from your own, such as Custom Coding, you usually must register that
name -- known as a fictitious business name -- with your county. In
practice, lots of businesses are small enough to get away with ignoring
these requirements. But if you are caught, you may be subject to back
taxes and other penalties.
To read and printout a copy of the Form please link below.
Questionnaire: Where Am I on the Road to Financing My Business Purchase?
You can download a free copy of Adobe Acrobat Reader at