{"id":4876,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/sole-proprietorships.html"},"modified":"2025-10-23T14:36:00","modified_gmt":"2025-10-23T19:36:00","slug":"sole-proprietorships","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/sole-proprietorships.html","title":{"rendered":"Sole Proprietorships Law"},"content":{"rendered":"\n
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Sole Proprietorships Law<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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A sole proprietorship<\/span> is an unincorporated business<\/span> owned and run by one person. While it is a simple business structure<\/span>, there are no legal protections<\/span>. The sole owner<\/span> has unlimited liability<\/span> for the business debts and lawsuits.<\/p>\n\n <\/div>\n\n\n\n

For many business owners, starting a sole proprietorship<\/span> is a popular choice. While it\u2019s simple and straightforward, like all business structures<\/span>,\u00a0it has its pros and cons. If you\u2019re a sole proprietor<\/span>, you\u2019ll deal with tax returns<\/span>, sales tax, and more. So, let\u2019s dive into the world of sole proprietorship<\/span>.<\/p>\n

What Is a Sole Proprietorship<\/span>?<\/h2>\n

A sole proprietorship<\/span> is a type of business where there\u2019s no distinction between the business entity<\/span> and the owner. Sole proprietorships<\/span> are the simplest of all legal structures, but they also lack many of the legal and financial protections of other business forms. Sole proprietors<\/span> experience the key advantage of being their own boss but concurrently shoulder the burden of being responsible for the business\u2019s success and failure.<\/p>\n

Business owners who are sole proprietors<\/span> report business income<\/span> on their individual income <\/span>tax<\/span> returns<\/span>. This means they pay taxes on their personal income<\/span>. Unlike a\u00a0C corporation<\/a>\u00a0or\u00a0limited liability company<\/span><\/a>\u00a0(LLC), a sole proprietorship<\/span> doesn\u2019t have separate taxes or legal structures.\u00a0<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

Pros and Cons of Sole Proprietorships<\/span><\/h2>\n

For many small business<\/span> owners<\/span>, the allure of a sole proprietorship<\/span> lies in its simplicity. It offers an uncomplicated setup, often requiring minimal paperwork, record-keeping<\/span>, and legal formalities. When it comes to filing taxes, the process is relatively straightforward. Business income<\/span> and expenses are reported directly on the owner\u2019s personal tax form using the owner\u2019s social security<\/span> number<\/span>.<\/p>\n

A significant advantage of a sole proprietorship<\/span> is the ability to claim tax deductions for business expenses. However, a notable challenge is the self-employment<\/span> tax<\/span>, which\u00a0covers\u00a0costs such as social security<\/span>. Additionally, while the structure provides ease, it also exposes the owner to personal liability<\/span> for all business activities<\/span>. This is a major concern to many.<\/p>\n

How To Start a Sole Proprietorship<\/span><\/h2>\n

Starting this type of business is easy. Often, no special paperwork is needed. However, business owners should always check their local rules. Some cities might require you to get a business license<\/span><\/a>. Also, remember to name your business. It can be your name or something unique.<\/p>\n

Naming Your Business<\/h3>\n

If you are electing to run a business by yourself, you\u2019ll need to learn how to choose a business name<\/span>. Many sole proprietors<\/span> choose a company name other than their legal name. If you do, you\u2019ll need to file a “doing business<\/span> as” (DBA<\/span>) with the county or state where the principal place of business is located, depending on your state law<\/a>. For example, if your name is John Smith and you choose to name your business “Bob Jones Trucking Company,” be sure to file the proper forms. You should also set up the business bank account<\/span> under the business name<\/span>.<\/p>\n

Sole Proprietorship<\/span> Taxes<\/h2>\n

Understanding taxes is crucial for those operating a sole proprietorship<\/span>. One of the main features of sole proprietorship<\/span> taxes is that the net profits go through to the owner\u2019s personal <\/span>tax returns<\/span>. This means that the net business income<\/span> and expenses are reported on an individual\u2019s federal tax return<\/span>.\u00a0<\/p>\n

Additionally, there may be other taxes to consider. Excise taxes are sometimes applicable depending on the nature of the business. If a sole proprietor<\/span> has employees, payroll taxes become relevant, and sole proprietors<\/span> must register for an Employer Identification Number<\/span> (EIN). Proper tax withholding procedures must be in place.<\/p>\n

A sole proprietor<\/span> is responsible for several tax payments. Come tax year, sole proprietors<\/span> file taxes using various forms. Most use\u00a0Form 1040<\/a>,\u00a0Schedule C<\/a>, and\u00a0Schedule SE<\/a>. Business income<\/span>, expenses, and self-employment<\/span> taxes<\/span> are all reported here. But it\u2019s vital to keep track of all business expenses for tax purposes. This includes payments toward social security<\/span> and Medicare<\/span> taxes.\u00a0<\/p>\n

It\u2019s essential to file the correct IRS<\/span> form to report these. For most sole proprietors<\/span>, this means using Schedule SE to calculate and report their self-employment<\/span> tax<\/span>.<\/p>\n

Being in business for yourself means you are required to list your business\u2019s profit or loss information on Schedule C. You will submit this to the IRS<\/span> and file Form 1040. There are several deductions you will be allowed to take, but be sure to seek guidance from a tax attorney or other qualified professional if you have questions.<\/p>\n

Another tax concern is the\u00a0Federal Unemployment Tax Act<\/a>\u00a0(FUTA). Sole proprietors<\/span> may need to pay this federal unemployment tax if they have employees. The specifics of FUTA can be intricate. Understanding when and how to make these payments is crucial for tax preparation.<\/p>\n

Sole Proprietorships<\/span> and Your Significant Other<\/h2>\n

If you and your partner run the business<\/a>, you\u2019re both considered joint owners of the business. The IRS<\/span> may consider this to be a partnership, even if that\u2019s not the couple\u2019s intention. As a partnership, the couple will be required to file a partnership return and issue a tax document known as a\u00a0Schedule K-1<\/a>\u00a0to themselves,\u00a0as opposed to reporting on a Schedule C. For many family businesses, it will be wise to seek the guidance of a tax professional to further understand their potential liability and obligations.<\/p>\n

Personal Liability<\/span> for Sole Proprietorship<\/span><\/h2>\n

One of the major disadvantages of running a sole proprietorship<\/span> is the unlimited personal liability<\/span> you will incur. In other words, there is no legal separation between business and personal liability<\/span>. If the business owes money, creditors can go after the business owner\u2019s personal assets<\/span>. Unlike an LLC<\/a>, a sole proprietorship<\/span> does not offer liability protection.<\/p>\n

For instance, if you took out a loan to help buy office supplies or a new computer, your creditors can sue you personally if you default on your obligations. Keep in mind many businesses begin as sole proprietorships<\/span> and graduate to more complex business forms as the business develops.<\/p>\n

Changing a Sole Proprietorship<\/span> to a Business Entity<\/span><\/h2>\n

For some, a sole proprietorship<\/span> works. But as your business grows, you might consider change. You may want to convert your business to a business entity<\/span> such as a C corporation<\/a>, nonprofit<\/span> corporation<\/a>, or even a single-member LLC<\/a>. Each has its own tax rate, tax credit, and benefits like health insurance deductions.<\/p>\n

A single-member LLC<\/a> closely resembles a sole proprietorship<\/span> in tax treatment but provides personal liability<\/span> protection for business debts. This means any liabilities from your business will only affect your business assets<\/span>, not your personal ones.<\/p>\n

A sole proprietorship<\/span> is a good choice for a new business<\/span> startup<\/span>, but always review your business structure<\/span> and your net profit to\u00a0make sure you\u2019re meeting all tax requirements. When in doubt, consult a legal professional.<\/p>\n

Do I Need a Business Lawyer?<\/h2>\n

Hiring the best business attorney for your sole proprietorship<\/span> needs is an important process. Small businesses<\/span>, such as sole proprietorships<\/span>, often need help with negotiating contracts with customers or suppliers, assisting with real estate needs,\u00a0such as a lease or a building purchase, taxes, zoning, and licenses, protecting intellectual property, or settling litigation. The right business attorney can save your organization money and time in dealing with complex legal matters.<\/p>\n

Speak to an\u00a0experienced business law attorney<\/a>\u00a0today.<\/p>\n\n\n

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