Jump to: Select Subheading. The legal status of a sole proprietorship can be defined as follows: It is not a separate legal entity from the business owner The business owner has unlimited liability i.
Did you find this page useful? Accounting and Corporate Regulatory Authority. How-to Guides. Enforcement Notices. Corporate Service Providers. Public Accountants. AQI Industry Information. 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 if you have employees , a seller's license from your state, and a zoning permit from your local planning board. If you do business under a name different from your own such as "Custom Coding" instead of "Jim Smith Graphics" , you usually must register that name -- known as a fictitious, or assumed, business name -- with your county.
For more information on filing and publishing a fictitious business name statement, see Registering Your Business Name. 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. For more help in deciding on the best legal structure for your business, see LLC or Corporation?
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In some states, the information on this website may be considered a lawyer referral service. Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. Grow Your Legal Practice. Meet the Editors. Sole Proprietorship Basics. The sole proprietorship is the simplest legal structure for owning your own business.
Personal Liability for Business Debts A sole proprietor can be held personally liable for any business-related obligation. Examples Example 1: Lester is the owner of a small manufacturing business. Take our business formation quiz for help deciding the best structure for your business.
Business Formation. Choosing a Business Structure. Sole Proprietorships. Forming a Corporation. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.
For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business's owner.
The main benefits of a sole proprietorship are the pass-through tax advantage mentioned before, the ease of creation, and the low fees of creation and maintenance. With a sole proprietorship, you do not need to fill out a tremendous amount of paperwork, such as registering with your state. You may need to obtain a license or permit, depending on your state and type of business. But less paperwork allows you to get your business off the ground faster.
In addition, because you are not required to register with your state, you do not need to pay any fees associated with renewing your registration or any other fees associated with the process. This saves you a lot of money, which is important when starting your own business.
With a sole proprietorship, you don't need a business checking account, as other business structures are required to have. You can simply conduct all your finances through your own personal checking account. There are The disadvantages of a sole proprietorship are the unlimited liability that goes beyond the business to the owner and the difficulty in getting capital funding, specifically through established channels, such as issuing equity and obtaining bank loans or lines of credit.
When a business is registered, it has some protection from the state. As a sole proprietorship is not registered, you have no support when it comes to liability. An LLC has protection against creditors from seizing your personal assets, such as your home. With a sole proprietorship, you do not have such protection. Funding can also be difficult with a sole proprietorship.
Banks prefer to work with companies that have a track record. Being an individual who is starting out with a small balance sheet can make it a risky endeavor for banks to lend money. Also, obtaining equity from large investors can be difficult as they prefer more refined startups. Thus, entrepreneurs begin as an entity with unlimited liability. As the business grows, they often transition to a limited liability entity, such as an LLC or LLP, or a corporation e. Most small businesses start as sole proprietorships but end up evolving into different legal structures as time passes and the company grows.
The company creates and sells energy bars, and it began as a local vendor in Schade's hometown of Victor, Idaho. The sole proprietorship sold its energy bars at local farmer's markets and then expanded to sell online and to a few accounts in Jackson, Idaho. A sole proprietorship has no separation between the business entity and its owner, setting it apart from corporations and limited partnerships. Since launching in , Kate's Real Food has grown to supply accounts across the country.
She restructured the business from a sole proprietorship to a corporation to take on investments and expand, which is a natural step for a growing business. Usually, when a sole proprietor seeks to incorporate a business, the owner restructures it into an LLC. In order for this to work, the owner must first determine that the name of the company is available. If the desired name is free, articles of organization must be filed with the state office where the business will be based.
After the paperwork is filed, the business owner must create an LLC operating agreement, which specifies the business structure. To start a sole proprietorship you need to for the most part just start your business. It does not require registering with your state.
It is recommended to come up with a company name and then apply for a permit or license with your city and state if needed. If you plan to hire employees then you will need an employee identification number EIN from the IRS and if you are going to sell taxable products you will need to register with your state. Yes, a sole proprietor is the same as self-employed.
A sole proprietor does not work for any company or boss, just for themself, hence they are self-employed. Filing taxes as a sole proprietor requires you to fill out the standard tax Form for individual taxes and then Schedule C, which reports the profits and loss of your business.
The amount of taxes you owe will be based on the combined income of both Form and Schedule C.
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