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Sole Proprietorship

A Sole Proprietorship is the simplest and the most cheapest business form to establish. This is the way most businesses begin. Sole Proprietorships are generally owned by one person, sometimes more than one. A Sole Proprietor owns all the business assets and profits, and is responsible for all debt and liabilities of the business personally.

A sole proprietor declares tax (profit or loss) on his own, personal income tax return. A business formed as a Sole Proprietorship can be transferred to another party as part or as a whole. If you are the buyer of a Sole Proprietorship, you have to check if you're buying only the assets of the business, or you're buying both the assets and liabilities, which is very important.


Sole Proprietorship - Pros:

- The easiest way to form a business
- Cheaper to run than any other form of business
- No shareholders or partners, sole proprietor receives all the income generated by the business
- Easy to break up
- Sole proprietors make their own decisions, earnings can be put back into the business under own decision.
- Business profits from a Sole Proprietorship run straight to the personal tax return of the owner.

Sole Proprietorship - Cons:

- A Sole Proprietorship is not a limited liability business formation. A Sole proprietor has absolute liability of the business and is legally liable for all debts, therefore their personal assets are in danger.
- Part of the benefits and deductions that other forms of businesses have may not be available for a Sole Proprietorship
- Funding of the business may be a difficult issue when funding of the business is needed, or in general. A Sole proprietor may have to use his personal savings account for funding the business, or may have to use a more expensive credit than other businesses.
- The business may look unprofessional, keeping professionals (whether an employee or a company) away from the business

Tax Forms needed by a Sole Proprietorship:

Form 1040: Individual Income Tax Return
Schedule SE: Self-Employment Tax
Form 8829: Expenses for Business Use of your Home
Schedule C: Profit or Loss from Business (or Schedule C-EZ)
Form 4562: Depreciation and Amortization
Employment Tax Forms
Form 1040-ES: Estimated Tax for Individuals

Return to article: How to Register a New Business


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