A sole proprietorship is owned and run by one individual who receives all profits and has unlimited responsibility for all losses and debts. A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The individual entrepreneur owns the business and is fully responsible for all its debts and legal liabilities.
The owner receives all profits subject to taxation specific to the business and has unlimited responsibility for all losses and debts. This means that the owner has no less liability than if they were acting as an individual instead of as a business. Examples include writers and consultants, local restaurants and shops, and home-based businesses.
Mom and pop store : This is a small proprietor with a small shop. A sole proprietor may use a trade name or business name other than his or her legal name. In many jurisdictions, there are rules to enable the true owner of a business name to be ascertained.
In the United States, there is generally a requirement to file a doing business as statement with the local authorities.
The advantages of a sole proprietorship versus other forms of organizations is the relative ease of set-up and the lower start-up costs. The sole proprietor form of business ownership is the most common form in the United States and also the simplest. This means that any debts incurred must be paid by the owner. This form of business has several advantages. As a sole proprietor, filing your taxes is generally easier than a corporation.
Simply file an individual income tax return IRS Form , including your business losses and profits. Your individual and business income are considered the same and self-employed tax implications will apply. Terry Masters has been writing for law firms, corporations and nonprofit organizations since Her online articles specialize in legal, business and finance topics. She holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.
Share on Facebook. Stockholders Corporations are designed by law to vest ownership of the business in shares of stock. Sole Proprietorship A sole proprietorship is a business activity that operates under the name and responsibility of the owner.
For example, if the owner dies, the business no longer exists. And, unless the owner files a "doing business as" with the appropriate jurisdiction, the business operates under the legal name of the owner. Because the business does not exist separately from the owner, any profits or losses from the business are taxed as personal income or loss to the owner.
The owner of the sole proprietorship is also personally liable for any debts incurred by the business. Most states do not require a business owner to register their sole proprietorship with the state. Still, it is often helpful to consult an attorney or an online legal services provider when starting a sole proprietorship. If two or more individuals wish to form a business together, a partnership is often the appropriate form of business.
Similar to a sole proprietorship, most states do not require a partnership to register or file formal documents with the state. Profits and losses are taxed to the owners of the partnership directly. Note that also like a sole proprietorship a partnership provides the owners with no liability protection. A partnership choosing to operate with a fictitious name files a "doing business as" with the appropriate jurisdiction.
If the sole proprietor intends on suing another party, he can do so by bringing a lawsuit in his own name. Likewise, if another party is suing the company, the legal suit will be brought against the individual owner and not the company. However, this is not how other business structures are handled; corporation and LLC owners will initiate lawsuits in the name of a company.
Sole proprietors rely heavily on bank loans and personal assets to establish their business. Once the business begins to grow, the owner might choose to convert to a corporation or LLC, depending on the business objectives and overall net profits. However, some people choose to run a sole proprietorship for years without converting.
There are many advantages of operating a sole proprietorship , including the following:.
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