A sole proprietorship is an unincorporated business owned and operated by a single individual. It is one of the simplest structures under which a business can operate. Under this structure, there is no distinction between the business and the owner. You are entitled to all the profits and are personally responsible for all of the business’s debts, losses, and other liabilities.
Forming a Sole Proprietorship
Part of what makes a sole proprietorship so easy to start is that no formal action is needed to form it. As long as you stay the only owner, the status of sole proprietorship is automatically given to your business based on its activities.
However, as with any business, you need to obtain the necessary licenses and permits for your business to operate within the bounds of the law. If you want to operate under a name different from your own, you will likely need to register your trade name (commonly known as a DBA).
To do this, you have to choose a name that has not already been claimed by another business. In Georgia, you must register the name by submitting the appropriate paperwork to the Superior Court of any county in which you are doing business.
Tax Treatment of a Sole Proprietorship
Because you and your business are treated as one under this model, the business’s income is not taxed. The revenue generated by the business is treated as your personal income.
This being the case, you have to report income and/or losses and expenses with a Schedule C and a standard Form 1040. The “bottom-line-amount” that appears on the Schedule C transfers to your personal tax return, putting the responsibility to withhold and pay all income taxes on you, including self-employment and other estimated taxes.
Pros and Cons of a Sole Proprietorship
- They are easy and inexpensive to form.
- You have complete control over the business.
- Tax preparation is easy since the business is not taxed separately.
- The tax rates on a sole proprietorship are among the lowest of the various business structures.
- As a sole proprietor, you have unlimited personal liability, meaning that you are personally liable for all debts and obligations of the business. You are also directly liable for your employees. This is because your business is not seen as a separate entity.
- It can be difficult to raise money as a sole proprietor since you can’t sell interest in the business and investors are already hard to come by. It can also be more difficult to get a loan from a bank since sole proprietorships are seen as less capable of repaying if the business fails.
- It’s all on you. The pressure that comes from running your own business is already tough enough, and with a sole proprietorship, it’s even harder. A failed sole proprietorship can cripple a person financially if too much of their money is tied up in the business.
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