A sole proprietorship is is an unincorporated business owned and run by one individual with no distinction between the business and the owner.
Sole proprietorships are the simplest and most common form of small business ownership, representing 73% of all businesses in the United States today (a total of 23 million were reported by the IRS in 2010).
The owner is entitled to all profits and are responsible for all of the business’s debts, losses, and liabilities, and pays personal income tax on profits earned from the business. The owner is not required to formally register their business with their state, like corporations or LLCs do.
With little bureaucracy required, a sole proprietorship is the simplest business to set up or take apart, making it popular among individual self-contractors, consultants, and small business owners.
Because creating a separate business or trade name isn’t necessary, many sole proprietors do business under their own names. If they do opt to do business under a different name, it does not create a separate legal entity – the name is simply a trade name.
Essentially, you set up a sole proprietorship simply by conducting business if you are the only “owner.” It is not necessary for you to take legal or formal steps to establish a sole proprietorship. In fact, you may already own one without knowing it.
If you are a freelance writer or photographer, for example, you are a sole proprietor. Depending on industry, state, and local regulations, you may however have to obtain various permits of licenses.
Sole proprietorships benefit from pass-through taxation, which means that all business income or losses is reported on your personal income tax return and the business itself is not taxed separately, avoiding any chance of double taxation.
As mentioned above, you can conduct business under your own name or any business name you choose without it being official. However, if you choose to file your business name, very little paperwork is required.
To do this, you just need to submit a completed “Doing Business As” form at your local courthouse. Fees and requirements vary by state, but tend to be very minimal.
Once that is done, you will be given a certificate which you can use to apply for business bank accounts and credit cards.
There are over 23 million sole proprietorships currently operating in the United States, making it by far the most popular form of business ownership.
Most small businesses start as sole proprietorships and change to different legal structures as they grow.
Some examples of famous companies that started as sole proprietorships include:
The key difference between a sole proprietorship and a corporation is that a corporation is separate legal entity from its owners, while a sole proprietorship means that the business and the owner are one and the same.
The largest difference between a sole proprietorship and an LLC is the issue of limited liability protection.
Sole proprietors have unlimited liability for business debts, lawsuits, and other business-related obligations, while members of an LLC are released from such liability as individuals.
A sole proprietorship is an unincorporated entity that does not exist apart from its sole owner, while a partnership is two or more people agreeing to operate a business for profit and forming a legal entity.
Unlike a sole proprietorship, an S Corp is a separate legal entity from the owner and offers limited liability.
Like sole proprietors, S corporation owners are also eligible for the 20% pass-through tax deduction established under the Tax Cuts and Jobs Act for pass-through business entity owners.
However, S Corps sometimes come with other benefits in terms of Social Security and Medicare taxes, potentially offering a way to take some money out of your corporation without paying Social Security and Medicare taxes.
Generally and federally, you are not required to register to operate a sole proprietorship. However, some states may have different laws.
Yes. Despite the fact that a sole proprietorship is not technically a business entity, owners can hire employees.
There is no limit on the number of employees that a sole proprietor can employ; however, as the employer, a sole proprietor is responsible for filing taxes and proper administration for all employees.
Sole proprietorships are not legally required to have a business bank account, unless they have a DBA.
LLCs and sole proprietorships are mutually exclusive business structures. LLCs are incorporated, while sole proprietorships are unincorporated.
If you’re looking to change your sole proprietorship to an LLC, you first need to ensure 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 headquartered.
After that paperwork is filed, the business owner must create an LLC operating agreement, which outlines the business structure.
Finally, an employment identification number (EIN) needs to be obtained from the Internal Revenue Service (IRS).