Sole proprietorships are one-person businesses that are not registered with the state as either corporations or a limited liability companies (LLC). In this way, sole proprietorships are easy to set up and maintain. So easy, in fact, that it’s possible to own one without knowing it.
For example you have a sole proprietorship if:
- You’re a freelance photographer or writer
- A craftsperson who works on a contract basis
- A salesperson working on commission only
- An independent contractor who isn’t on an employer’s regular payroll
However, this doesn’t mean that you’re free from responsibility. Chances are that you need to have to comply with local registration, business licenses and/or permit laws to make your business legitimate. Moreover, you should pay close attention when tending your business, as you are responsible for paying your income taxes and business debts.
Personal Liability for Business Debts
Sole proprietors are usually held personally liable for any business-related obligations. Meaning if your business doesn’t pay a supplier, defaults on a debt, or loses a lawsuit, creditors can legally come after your house or other possessions.
Comparatively, the law protects owners of corporations and LLCs with “limited personal liability” for business obligations. Unlike with sole proprietors and general partners, corporation and LLC owners can normally keep their house, investments and other personal property safe from collectors even if their business fails. For those who will engage in a risky business, forming a corporation or an LLC is definitely the safer option.
Paying Taxes on Business Income
From a legal standpoint, a sole proprietorship is not separate from the person who owns it. This means that a sole proprietor reports all business incomes and/or losses on their individual income tax return. Moreover, it will be your responsibility for withholding and paying income taxes, whereas, with a ‘normal’ job, your employer would do this for you. This is done by paying a ‘self-employed’ tax consisting of Social Security, Medicare and estimated taxes through the year. For more information, see How Sole Proprietors Are Taxed.
Registering Your Sole Proprietorship
You do not typically have to file special forms or pay fees to be a sole proprietor. The only thing you need to do is state that your business is a sole proprietorship. This is done after you complete the general registration requirements that apply to all new businesses. Most cities and countries, however, do require even the smallest sole proprietorships to register and pay a minimum tax. Doing this will mean you receive a business license or a tax registration certificate. If you have employees, you will need to obtain an employer identification number from the IRS, as well as a seller’s license from your state and a zoning permit from your local planning board.
One thing to remember is if you do business under a name different from your own you will need to register that name.
Starting a business can be difficult and finding the right people to help you make it a success can be even more difficult. MaxFilings can help you make decisions in order to make your new business a success. If you are just starting a new business or are looking to help your business flourish, do not hesitate to check out our Knowledge Center to learn everything you need to know about start a corporation along with other helpful information.