When you start a business, there are many ways for you to structure your company. Many established businesses started as sole proprietorships. This business type is very simple to set up and is certainly the cheapest option. However, along with the benefits come some drawbacks, like the lack of limited liability. To learn more about this business type, look at the frequently asked questions and their answers below.
1. Question: What is a sole proprietorship?
A sole proprietorship qualifies as a company, but it only has one owner and isn’t required to register with state enemies. Beginning a sole proprietorship is extremely simple and doesn’t require a formal filing or paperwork process. All you have to do is simply go into business. Though as a sole proprietor you are exempt from tedious paperwork, you must still acquire the standard set of permits and licenses of your industry. If you seed the term DBA, it stands for “doing business as” and is frequently used to indicate the existence of a sole proprietorship.
2. Question: How is a sole proprietorship different from other company structures?
You’ve probably heard of limited liability corporations (LLCs), limited liability partnerships (LLPs) and corporations. Sole proprietorships are business just like these companies, but they vary in a few key ways:
- Sole proprietors are the cheapest business type when it comes to operational and other costs.
- Sole proprietorships are the least complex of the legally recognized business structures.
- vSole proprietorships are exempt from mandatory state registration laws.
- Sole proprietorships don’t require formal paperwork.
- Sole proprietorships don’t shield individuals from business related debts or liability.
- Sole proprietorships don’t require a tax filing separate from personal income. Naturally, there are many differences between sole proprietorships and corporations, but these are some of the most noticeable hallmarks of them.
3. Question: How does tax law treat sole proprietorships?/h3>
In the eyes of the Internal Revenue Services and related legal regulations, you and your proprietorship are the same entity. This means that any profit you gain through your sole proprietorship is also counted as personal income. Your individual tax return and business tax return will be one in the same. However, you should also note that sole proprietors may be eligible for certain tax credits and taxation rules. For example, self-employed individuals enjoy a standard tax deduction and a modified tax rate to account for their lack of employer subsidized benefits.
4. Question: Are you personally liable for your sole proprietorship?
Yes, you are personally liable for your sole proprietorship. While corporations, LLCs and limited liability partnerships gain the benefit of limited liability, sole proprietors generally do not qualify for such protections. Instead, you will be held personally accountable for your businesses debts and legal judgments. If you cannot pay your debts, your personal assets like automobiles, properties, etc. can come into play. For this reason, you should be careful in how you set up your proprietorship. Additionally, consider securing adequate insurance coverage for your risks and liabilities.
5. Question: Do sole proprietorships need to be registered like LLCs or corporations?
If you own a sole proprietorship, generally you shouldn’t have to go through the same registration hoops as an LLC, limited partnership or corporation. Instead, you can usually just declare your intention to operate as a sole proprietorship. Usually, you will need to register your sole proprietorship locally and pay a minimal tax. In return for this registration, you will get a tax registration certificate and a business license. Get an EIN or employee identification number and if you intend to do business under a name different from your legal name, you may have to register this name with your local government. Before you jump right in, make sure you’ve taken all the steps for legal and smooth operations.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.