A sole proprietor is an individual who owns and operates their own business. The easiest and most common business to set up is a sole proprietorship. Sole proprietors fill out fewer tax forms and pay less to start their businesses.
Who is a sole proprietor in the eyes of the government? A sole proprietor is recognized as the same legal entity as the business. As the business owner, you are entitled to all the company’s revenue. But, you are also responsible for all the company’s debt. Because there is no legal separation between you and the business, all your personal assets are at risk.
You run your sole proprietorship by yourself with complete control of the business. You make all decisions for your company.
You don’t have to declare your business as a sole proprietorship. When you start a business alone, you’re automatically a sole proprietor. You can choose to operate as a different type of business structure, or remain a sole proprietorship.
You need licenses and permits to operate your business. Your license and permit requirements depend on your industry, state, and locality.
Choosing a business name
When you form a sole proprietorship, your name is automatically the legal name of your business.You can create a different name for your business. The separate name is called a doing business as (DBA) name. If you want to go by a DBA name, you must register your business name with your state. A DBA name might also be called a fictitious name.
For example, let’s say Jane Smith is a sole proprietor who owns a dress shop. To call her store Jane’s Dress Shop, she has to register the DBA name with her state or local government agencies. Once she is registered, Jane must use her legal name for any government forms or applications she fills out.
Who is a sole proprietor required to file tax forms as?
As a sole proprietor, you file income from your business as part of your personal income. To report business income and expenses, you file Schedule C, Profit or Loss From Business. Schedule C is part of your Form 1040, U.S. Individual Income Tax Return. You record the bottom line from Schedule C on Form 1040.
You have to withhold and pay all income taxes as a sole proprietor. You must pay self-employment tax on your profits. You may need to pay estimated taxes quarterly, as well.
As a sole proprietor, you have the lowest tax rates of all business structure types. Your tax rate is based on your personal tax bracket. Your taxes are also the easiest to fill out compared to other business structures.
Owners of sole proprietorships need to keep tax-based records. Keep organized records throughout the year as you conduct business. Organized records will help you with accurate tax filings so that you can avoid IRS penalties. Some information to track includes your income, allowable business expenses, vehicle mileage, and employment tax deposits.
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This article was updated from its original publication date (7/25/2013).