A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the individual as owner. The soul owner is entitled to all profits and are responsible for all business’s debts, losses and liabilities.

Forming a Sole Proprietorship

No formal action is required to form a sole proprietorship. As long as there is only one owner, the status automatically comes from your business activities.  But like all businesses, a sole proprietor needs to obtain the necessary licenses and permits. In most cases the business with need a DBA designation unless the owners FULL NAME appears in the business name and on all checks received by the business.  In other words if the owners name is John Smith and they have a decking business, the would have to be called “John Smiths Decking” which would need to appear on all checks.  “Smith’s decking” would not be allowed and would need to be registered as a DBA

If you choose to operate under a name different than your own, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"). You must choose an original name; it cannot already be claimed by another business.

Sole Proprietor Taxes

Because the owner and the business are one and the same, the business itself is not taxed separately-the sole proprietorship income is the owners income who would report income and/or losses and expenses with a Schedule C  and the standard Form 1040 . The “bottom-line amount” from Schedule C transfers to their personal tax return. It’s the owners responsibility to withhold and pay all income taxes, including self-employment and estimated taxes . You can find more information about sole proprietorship taxes and other forms at IRS.gov.

Advantages of a Sole Proprietorship

• Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
• Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
• Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.

Disadvantages of a Proprietorship

• Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
• Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.