Forming a Sole Proprietorship
You do not have to take any formal action to form a sole proprietorship. arsenic long as you are the alone owner, this status mechanically comes from your business activities. In fact, you may already own one without knowing it. If you are a freelance writer, for exercise, you are a lone owner .
But like all businesses, you need to obtain the necessary licenses and permits. Regulations deviate by industry, state and vicinity. Use the Licensing & Permits instrument to find a listing of federal, state and local permits, licenses and registrations you ‘ll need to run a business.
If you choose to operate under a name different than your own, you will most likely have to file a assumed name ( besides known as an simulate name, trade wind diagnose, or DBA identify, short for “ doing occupation as ” ). You must choose an original name ; it can not already be claimed by another business.
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Sole Proprietor Taxes
Because you and your business are one and the lapp, the business itself is not taxed separately-the sole proprietorship income is your income. You 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 your personal tax return. It ’ s your province to withhold and pay all income taxes, including self-employment and estimate 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 licenses 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. You cannot sell stock in the business, which limits investor opportunity. Banks are also hesitant to lend to a sole proprietorship because of a perceived additional risk when it comes to repayment if the business fails.
- Heavy burden. The flipside of complete control is the burden and pressure it can impose. You alone are ultimately responsible for the successes and failures of your business.