What Is A Sole Proprietorship?

little man in the boat

You might be operating as a sole proprietorship and not even know it. If you sell goods or services, do freelance work, operate a business online, don’t have any employees, or don’t pay taxes as a separate business, you would be considered a sole proprietorship. A sole proprietorship is owned and operated by one individual and there is no legal distinction separating the business from the individuals. This means that for tax purposes and liability-wise, you and your business are one in the same.

Formation of a sole proprietorship
There’s not much to form, seeing as a sole proprietorship is not a business structure. There is nothing legally separating the individual from their business, so that person’s income is any profit from the sole proprietorship, The owner of a sole proprietorship is responsible for any debts accrued and are taxed as an individual. This structure is formed instantly, inexpensively, and it is extremely simple, without many rules, regulations, or procedures.  Any profit your business makes goes directly into your pocket because you are considered one in the same with the business. If you’re already selling goods or services, that business activity can mean you’re operating a sole proprietorship.

Taxes
You will not be taxed separately from your business. You will list your sole proprietorship’s profit or losses on Schedule C of your tax return, which will be filed with Form 1040 the IRS. The “bottom line” amount on this form equals your personal tax return. It is fairly simple to fulfil tax requirements for a sole proprietorship, as opposed to a corporation or other type of legal business entity, and the tax rates are lower than if you were to form a legal business entity. Also, because you are self-employed, you must make contributions to Social Security as well as Medicare. These are known as self-employment taxes. You will file your self-employment taxes on Schedule SE, which you will submit with Schedule C and Form 1040.

Liability
You are solely accountable for any debt, service of process, or other liabilities brought against your business. Everything falls onto your shoulders and your personal assets are all at stake.  If you are offering goods or services that have an inherent level of liability, it may be smart to incorporate or form an LLC in order to get the liability protection that comes along with those business entities. If you choose to incorporate, the entity becomes separate from you, and your personal assets are protected. Instead it is the assets of the company itself that are at stake.

A sole proprietorship is a no-hassle, simple way to operate a business, and you might already be operating one.