What are Sole Proprietorships?

When you start up a business for yourself and don’t have any partners (except maybe for your spouse), you’re considered a sole proprietor.  Therefore, your company is a sole proprietorship.  You may also hear the terminology unincorporated business used when talking about sole proprietorships, as it’s a business with only one owner who pays personal income tax on the profits earned by their business.

Often when we think of the word “proprietor”, we envision a shopkeeper, or some small brick and mortar storefront.  However, from a tax perspective, proprietor implies any unincorporated business owned entirely by one person.  So, sole proprietors can (and often) are individuals in specialized fields like doctors, lawyers, accountants, engineers, etc.  You can even find other specialists (like graphic designers, publicists, or programmers), who set up their own consulting businesses and therefore are classed as sole proprietors.  Basically, this is a classification for independent service providers.

Many sideline businesses are sole proprietorships, and often start-up companies begin as this business structure. Interestingly, sole proprietorships are the most common type of business structure.  One in six filed the form 1040 with the IRS consists of a Schedule C or C-EZ, which are the forms used by sole proprietorships.

While there are no rules to become a sole proprietor—you just run your company—you may need to register your business with your city, county, or regional federal government by submitting the required paperwork.  You can list your personal name or a fictitious company name (FBN).   You may also hear this referred to as DBA or “doing business as”, when talking about company names.

There are advantages and disadvantages to operating as a sole proprietorship.  For instance, from a legal perspective, you’re directly liable for any financial obligations that your business would incur.  If you default on a business loan, the lender could go after not only your business’s property but also your personal property to fulfill the collection obligations.

In some states, there are protections for sole proprietors, like homestead security and laws shielding Individual Retirement Accounts (IRAs).  However, the only protection for your personal property is purchasing an insurance policy which gives you adequate coverage, as well as making sure you completely pay your business debts.

On the plus side, establishing a sole proprietorship is simple, and it gives you complete control over your business decisions.  More than 70% of all American companies are run as sole proprietorships.  It’s an easy business structure for sideline ventures, with more than half of all sole proprietors earning salaries in addition to their company revenue.

 


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