A sole proprietorship is the simplest and most common form used by one-person businesses. Its advantages are that it is quick, uncomplicated, and inexpensive to start.
Your business can only be owned and controlled by you. You can hire others to help you manage the business, but you will have legal responsibility for the business decisions they make that are within the course and scope of their employment.
You and your business are one and the same. There is no separate legal entity, which means you will have unlimited personal responsibility for your businessí liabilities and losses. So if your business canít pay its utility bill, the electric company can sue you personally. Also, your business has unlimited liability from creditors seeking to collect personal debts from you.
Your business will last as long as youíre alive and you want to keep it operating. When you die, the business technically no longer exists. The businessí assets and liabilities will become part of your estate. As a result, a sole proprietorship can present a greater challenge if you want to pass your business to your heirs without interruption.
You can sell all or any portion of a sole proprietorship business any time you wish.
As a sole proprietor, you will be taxed on all income from the business at your individual income tax rate. The business' income and deductible expenses are included on Schedule C of your individual income tax return. A separate federal income tax return is not required for the sole proprietorís business; thus, there is no double taxation on profits. However, you will have to pay self-employment tax on your business income.
A sole proprietorship may be the best form if you:
However, as your business grows, a sole proprietorship may no longer be the best organizational form. Increasing the size of your operations means getting more capital from creditors or investors. As your debt-to-equity ratio increases, creditors may become reluctant to lend to the business. To get capital from more investors (owners), you will likely have to change the form of your business.
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