Sole Proprietorships and Small Business: What You Need To Know

If you are doing business in your own name and are in business by yourself, then you have a sole proprietorship.

As a sole proprietor, you have unlimited personal liability for the debts and obligations of the business. You are allowed to use debt to finance your operations, but you are also personally liable for repaying the money.

Advantages

A sole proprietorship is easy to set up and operate. There are no forms to file with the state, and therefore, no organizational expenses.

However, if you are using a fictitious name for the business, a notice should be filed with the county or state in which you are doing business. There are no initial or continuing annual reports to file with the state, and there are no separate income tax forms to file--you simply file a Schedule C with your federal Form 1040 Individual Income Tax Return and applicable state income tax returns.

You should keep accurate records of your business income and expenses and make sure to keep those business items separate from your personal expenses.

Disadvantages

A sole proprietor is personally liable for all debts and obligations of the business. There is no limited liability as there is in a corporation or an LLC.

If things go badly, you will be required to pay off creditors. In addition, there is no continuation of the business if you become disabled or die--the business simply goes away.

As a sole proprietor, you can deduct all expenses reasonably attributed to the business from business revenues and all profits are directly taxable to the sole proprietor at individual income tax rates.

If you are planning on starting your business as a sole proprietor, consult your tax attorney to make sure this is a wise choice.