Chances are, you’re already active a sole proprietorship. Now, brainwash yourself on the pros and cons, the tax implications, and the acknowledged liabilities to actuate if you appetite to abide a sole proprietorship.
May 12, 2005 5 min apprehend
Opinions bidding by Entrepreneur contributors are their own.
The sole cartel is the simplest business anatomy beneath which one can accomplish a business. The sole cartel is not a acknowledged entity. It artlessly refers to a being who owns the business and is alone amenable for its debts. A sole cartel can accomplish beneath the name of its buyer or it can do business beneath a apocryphal name, such as Nancy’s Nail Salon. The apocryphal name is artlessly a barter name–it does not actualize a acknowledged commodity abstracted from the sole freeholder owner.
The sole cartel is a accepted business anatomy due to its simplicity, affluence of setup, and nominal cost. A sole freeholder charge alone annals his or her name and defended bounded licenses, and the sole freeholder is accessible for business. A audible disadvantage, however, is that the buyer of a sole cartel charcoal alone accountable for all the business’s debts. So, if a sole freeholder business runs into banking trouble, creditors can accompany lawsuits adjoin the business owner. If such apparel are successful, the buyer will accept to pay the business debts with his or her own money.
The buyer of a sole cartel about signs affairs in his or her own name, because the sole cartel has no abstracted character beneath the law. The sole freeholder buyer will about accept barter address checks in the owner’s name, alike if the business uses a apocryphal name. Sole freeholder owners can, and generally do, amalgamate claimed and business acreage and funds, commodity that partnerships, LLCs and corporations cannot do. Sole proprietorships generally accept their coffer accounts in the name of the owner. Sole proprietors charge not beam formalities such as voting and affairs associated with the added circuitous business forms. Sole proprietorships can accompany lawsuits (and can be sued) application the name of the sole freeholder owner. Many businesses activate as sole proprietorships and alum to added circuitous business forms as the business develops.
Because a sole cartel is duplicate from its owner, sole cartel taxation is absolutely simple. The assets becoming by a sole cartel is assets becoming by its owner. A sole freeholder letters the sole cartel assets and/or losses and costs by bushing out and filing a Schedule C, forth with the accepted Anatomy 1040. Your profits and losses are aboriginal recorded on a tax anatomy alleged Schedule C, which is filed forth with your 1040. Then the “bottom-line amount” from Schedule C is transferred to your claimed tax return. This aspect is adorable because business losses you ache may annual assets becoming from added sources.
As a sole proprietor, you charge additionally book a Schedule SE with Anatomy 1040. You use Schedule SE to annual how abundant self-employment tax you owe. You charge not pay unemployment tax on yourself, although you charge pay unemployment tax on any advisers of the business. Of course, you won’t adore unemployment allowances should the business suffer.
Sole proprietors are alone accountable for all debts of a sole cartel business. Let’s appraise this added anxiously because the abeyant accountability can be alarming. Assume that a sole freeholder borrows money to accomplish but the business loses its above customer, goes out of business, and is clumsy to accord the loan. The sole freeholder is accountable for the bulk of the loan, which can potentially absorb all her claimed assets.
Imagine an alike worse scenario: the sole freeholder (or alike one her employees) is complex in a business-related blow in which addition is afflicted or killed. The consistent apathy case can be brought adjoin the sole freeholder buyer and adjoin her claimed assets, such as her coffer account, her retirement accounts, and alike her home.
Consider the above-mentioned paragraphs anxiously afore selecting a sole cartel as your business form. Accidents do happen, and businesses go out of business all the time. Any sole cartel that suffers such an adverse accident is acceptable to bound become a daydream for its owner.
If a sole freeholder is wronged by addition party, he can accompany a accusation in his own name. Conversely, if a association or LLC is wronged by addition party, the commodity charge accompany its affirmation beneath the name of the company.
You may already be operating a sole proprietorship. One of the abundant appearance of a sole cartel is the artlessness of formation. Little added than affairs and affairs appurtenances or casework is needed. In fact, no academic filing or accident is appropriate to anatomy a sole proprietorship; it is a cachet that arises automatically from one’s business activity.
This commodity was excerpted from the books Start Your Own Business and Entrepreneur Magazine’s Ultimate Book on Forming Corporations, LLC’s, Sole Proprietorships and Partnerships.
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