A sole proprietorship is owned and managed by one individual, the sole proprietor. The owner is personally liable for all debts and other liabilities as there is no separation between the entity and the individual.
The following are some characteristics of sole proprietorships:
- Control – When an individual creates a sole proprietorship that individual owns all the business assets and controls the business. A sole proprietor may hire employees to manage the business, but the sole proprietor also takes on the legal responsibility for employees.
- Liability – The sole proprietor has unlimited personal responsibility concerning business liabilities. Thus, business creditors can move against both the business assets as well as the sole proprietor’s personal assets to satisfy the business’s debt. The risks of operating a sole proprietorship can be offset with insurance. However, insurance usually will not cover ordinary business loses.
- Continuity and Transferability – A sole proprietorship will exist as long as the sole proprietor desires. If the sole proprietor dies, the sole proprietorship ceases to exist and becomes a part of the owner’s estate. However, a sole proprietor can freely transfer his business by selling some or all of the business assets.
- Taxes – A sole proprietorship is taxed on all business income at applicable individual tax rates. The individual’s tax return will list the business income and allowable business expenses. A sole proprietor is not required to file a separate federal income tax return, but he or she must pay self-employment tax on the business income.
A sole proprietorship is the simplest business entity to start and maintain. Furthermore, a sole proprietorship avoids the double taxation on profits that some other business structures may face. However, it is limited to one owner who is personally responsible for all liabilities.
The business organization laws vary depending on the state of incorporation. A business attorney can help you determine what type of business structure is best for your organization. Timelines and deadlines for creating a business organization are generally strict in many states. A lawyer can also assist you with following all the detailed procedural rules, contacting all the necessary state and federal officials, and adhering to the deadlines for organizing a business organization.