What is a Sole Proprietorship?
UPDATED: July 19, 2013
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A sole proprietorship is you doing business as yourself, even if you use a fictitious business name. It is simple but affords no asset protection. In a sole proprietorship, anything you do in business--or an employee of yours does -- is your personal liability and thus exposes all your personal assets to pay your business debts.
Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. Examples of people who are operating as sole proprietors include freelance photographers, producers, writers, contractors, or builders that take jobs on a contract basis. Sales associates who receive only commissions or independent contractors could also be considered sole proprietors. Many entrepreneurs start out as sole proprietorships because they cannot afford the expense of setting up a partnership or corporation. Operating a business as a partnership or corporation requires filings and reporting that can be complex, which in some instances may require an attorney’s assistance. A new business with a low-cost product and low overhead may not need or be able to afford to go through the expensive process of forming a partnership or corporation.
The major disadvantage of operating as a sole proprietorship is the lack of liability protection for the owner. 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. A sole proprietor simply reports all business income or losses on his or her individual income tax return, IRS Form 1040, Schedule C.
A sole proprietor can be held personally liable for any business-related obligation. This means that if your business fails to pay a supplier, defaults on a debt, or loses a lawsuit, the creditor can legally come after your house or other possessions. Additionally, any harm found to be the fault of your business will relate to you as an individual. As with any business decision, it is important to weigh the risks of this choice against the potential benefits.