Sole Proprietorship Basics 17

A sole proprietorship is a business that is owned by one person (and sometimes his or her spouse) and that isn’t registered with the state as a corporation or a limited liability company (LLC).

Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. For instance, if you are a freelance photographer or writer, a craftsperson who takes jobs on a contract basis, a salesperson who receives only commissions or an independent contractor who isn’t on an employer’s regular payroll, you are automatically a sole proprietor.

However, even though a sole proprietorship is the simplest of business structures, you shouldn’t fall asleep at the wheel. You may have to comply with local registration, license or permit laws to make your business legitimate. And you should look sharp when it comes to tending your business, because you are personally responsible for paying both income taxes and business debts.

Personal liability for business debts
A sole proprietor can be held personally liable for any business-related obligation. This means that if your business doesn’t pay a supplier, defaults on a debt or loses a lawsuit, the creditor can legally come after your house or other possessions.

Examples
Example 1: Lester is the owner of a small manufacturing business. When business prospects look good, he orders $50,000 worth of supplies and uses them in creating merchandise. Unfortunately, there’s a sudden drop in demand for his products, and Lester can’t sell the items he’s produced. When the company that sold Lester the supplies demands payment, he can’t pay the bill. As sole proprietor, Lester is personally liable for this business obligation. This means that the creditor can sue him and go after not only Lester’s business assets, but his other property as well. This can include his house, his car and his personal bank account.

Example 2: Shirley is the owner of a flower shop. One day Roger, one of Shirley’s employees, is delivering flowers using a truck owned by business. Roger strikes and seriously injures a pedestrian. The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley as a co-defendant. After a trial, the jury returns a large verdict against Roger — and Shirley as owner of the business. Shirley is personally liable to the injured pedestrian. This means the pedestrian can go after all of Shirley’s assets, business and personal.
By contrast, the law provides owners of corporations and limited liability companies (LLCs) with what’s called “limited personal liability” for business obligations. This means that, unlike sole proprietors and general partners, owners of corporations and LLCs can normally keep their house, investments and other personal property even if their business fails. If you will be engaged in a risky business, you may want to consider forming a corporation or an LLC. You can learn more about limiting your personal liability for business obligations by reading Nolo’s articles on corporations and LLCs.

Paying taxes on business income
In the eyes of the law, a sole proprietorship is not legally separate from the person who owns it. The fact that a sole proprietorship and its owner are one and the same means that a sole proprietor simply reports all business income or losses on his individual income tax return – IRS Form 1040 with Schedule C attached.

As a sole proprietor, you’ll have to take responsibility for withholding and paying all income taxes, which an employer would normally do for you. This means paying a “self-employment” tax, which consists of contributions to Social Security and Medicare, and making payments of estimated taxes throughout the year. For more information, see How sole proprietors are taxed.

Registering your sole proprietorship
Unlike an LLC or a corporation, you generally don’t have to file any special forms or pay any fees to start working as a sole proprietor. All you have to do is declare your business to be a sole proprietorship when you complete the general registration requirements that apply to all new businesses.

Most cities and many counties require businesses — even tiny home-based sole proprietorships — to register with them and pay at least a minimum tax. In return, your business will receive a business license or tax registration certificate. You may also have to obtain an employer identification number from the IRS, a seller’s permit from your state and a zoning permit from your local planning board.

And if you do business under a name different from your own, such as Custom Coding, you usually must register that name — known as a fictitious business name — with your county. In practice, lots of businesses are small enough to get away with ignoring these requirements. But if you are caught, you may be subject to back taxes and other penalties.

About the Author Nolo's mission is to make the legal system work for everyone -- not just lawyers. What we do: To help people handle their own everyday legal matters -- or learn enough about them to make working with a lawyer a more satisfying experience -- we publish reliable, plain-English books, software, forms and this website. Some… Read more »

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  • Bertina Broadnax

    I registered for my business name in my county. My question is how do I register the same name so it can’t be taken in any other states in the u.s?

  • Somename

    Unless you plan on doing business in the other areas, you really have no basis to do so, in my opinion.

    I have been to many small towns where small shops have the same name but no relationship whatsoever. The name of your business is not property. It is identification.

    Unless you are doing business in that area, your brand is non-existent.

    Intellectual property does not exist. Copyright, patent, and trademark laws are a convenience, nothing more. They are not compatible. Each has a limited purpose.

  • Pingback: How sole proprietors are taxed - Business Plan Help & Small Business Articles - Bplans.com

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  • Christine Morse

    Thank you for taking time to create this page. It has been very helpful. I will pay it forward.

  • http://notreadyyet BS Naidoo

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  • Ben O

    I have a registered LLC company. I wish to open another biz different from the purpose which I registered LLC, but want the biz to be owned or controlled by the LLC, which biz can I open, a sole proprietor or a fictitious company?

  • vinnie

    very useful info you’ve provided. it’s great for new comer to start off the business. Would like to know few things;
    1. i want to start off my own business as a marketing and sales, so how do i go about registering it?
    2. do i need to show , what kind of marketing/sales i want to do? any specific product/service?
    3. what i want to do is, buy any product directly from manufacturer and sell it at my own name ? is it possible?

  • Md

    Many thanks for this facility-I recently registered a business name and have many ideas and cannot focus on one idea then develop it. I am yet to start a sole prioprorship business.What can I do??

  • LaTrelle

    I would like to start a home based business baking cakes. What are the requirements in the state of Georgia for this type of home based business?

    • http://www.businessingeneral.com Chelle Parmele

      LaTrelle,

      I would strongly suggest you contact your local SBDC, SCORE or Chamber of Commerce for answers on your local business questions. Always best to go to the experts, and in this case, those offices would be your very best bet.

      ‘Chelle

  • Judy Vander Hook

    Can a sole proprieorship be a nonprofit charity?

  • http://www.businessingeneral.com Chelle Parmele

    Judy,

    We aren’t lawyers, and we really can’t give you advice in that area. This article was submitted by Nolo (a partner of Palo Alto Software) and they have a wealth of information on their website. I would suggest checking them out at Nolo.com or contacting your local Small Business Development Center or SCORE office for assistance.

    ‘Chelle Parmele
    Palo Alto Software

  • http://yahoo Mark Peraman

    I am planning to put up a piggery, together with my Dad. The ideas you have written on this page would be very helpful for our project. Thank you!

  • Dene Sarrette

    This is, by far, some of the best information I have found to date sole proprietorships! Thank you!

  • G. Bobson Bleh

    I really enjoyed reading your article on sole proprierorship. I am planning on starting my own business. I would like for you to advise me on how to start day care center for children.

    • Peter Solomon

      You’re better off forming a Corporation not Sole, daycare center carries tons of liabilities,.just saying.

  • http://www.symufa.com Ahmad

    How many business can be registered by a sole proprietor?

    I want to know that how many business a sole proprietor can run legally.

  • http://MRRielCo.yolasite.com Rene Riel

    I am an American living in Canada! I have some interests in my 1 1/2 year old business from the states(New Hampshire) Do you know what my rights and responsibilities are to: starting my business in the states? The parent company is M. R. Riel & Co. in southern Ontario, Canada.
    Who do I contact about exporting goods? Is there a hand guide I can get somewhere?