A sole proprietorship is the simplest and most common structure chosen when starting a business. It is an unincorporated business owned and run by one individual with no distinction between the owner and the business. Simply put, as a sole proprietor, you are entitled to all profits and are responsible for all business debts, losses, and liability.  

 

Sole Proprietorship Taxes​

Since you and your businesses are one and the same, the business is not taxed separately. Rather, you report your income/losses and expenses on Schedule C of your personal tax return which is the Standard Form 1040. The income or loss will flow from Schedule C to your personal tax return. It is the taxpayer's responsibility to withhold and pay all income taxes, including self-employment and estimated taxes.  

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Advantages of a Sole Proprietorship​

• control- As the sole owner of the business, you have complete control over all decisions.  

• ease of formation- A sole proprietorship is the easiest and least expensive business structure to establish.  Additionally, the costs of forming a sole proprietorship are minimal and usually only involve the costs associated with obtaining the respective licenses or permits to conduct your trade. 

• easy tax preparation- Given that your business is not taxed separately from yourself, you can complete the filing of your business taxes on just one tax return which is the personal Form 1040. 

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Disadvantages of a Sole Proprietorship​

• unlimited personal liability-  Since 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.  

• greater risk of an audit- While the IRS audits less than 1% of all returns filed when a sole proprietor reports income on a Schedule C between $25,000 and $100,000 the audit risk jumps to 2.4%.

• the difficulty of raising capital-banks are hesitant to lend sole proprietorships money because of a perceived additional risk of obtaining repayment if the business were to fail. 

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Given how easy they are to set up, sole proprietorships are by far the most popular business structure. However, the is not a legal separation between you and your business which can open you up to risk on a personal level. Due to such risk, most sole proprietors eventually convert their business to an LLC or corporation.