HOW TO BE A SOLE PROPRIETORSHIP WHY BE A SOLE PROPRIETORSHIP DISADVANTAGES TAX REPORTING & FORMS

The simplest form of a business is the sole proprietorship, which makes it the most common form of business for new small businesses. It is an unincorporated business with a single owner. It is simple and inexpensive to form. There are no documents or forms unless you want to operate under a different name or a business license is necessary in your jurisdiction. To find if a license is necessary in your area, contact the courthouse in your county seat. The county clerk will be able to answer any questions and provide any necessary forms.

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1. The owner has complete control over the business.
2. The sole proprietorship is easy to start and operate.
3. There are few startup expenses, since few legal documents are needed.
4. The business is not subject to double taxation. The income is only taxed once, on the individual owner's tax return.

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1. The owner is personally liable for the business' obligations.
2. No other owners may be admitted into a sole proprietorship.
3. It is limited to one person.
4. If another owner is needed or wanted, the sole proprietorship ends by default.

The owner of a sole proprietorship is personally liable for all obligations of the business. This means that if business assets are not sufficient to cover business debts, creditors may go after personal assets to satisfy the debt. Conversely, personal creditors may seize business assets to satisfy personal debts.

When deciding to form a sole proprietorship, you should consider the potential of lawsuits your business may be exposed to since you are personally liable for business debts. You may protect from this exposure by purchasing business insurance, or consider a different form of business, such as a corporation or a limited liability corporation.

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• Business income is reported on the owner's individual income tax return.
• Income and expenses are shown on Schedule C, Profit (or Loss) from Business, or Schedule C-EZ, Net Profit form Business, which is part of the business owner's individual tax return (FORM 1040).
• Net profit or loss is carried over from the Schedule C and reported on page one of the owner's FORM 1040.
• Individual tax rate determines the amount of tax paid on the earnings of the sole proprietorship.
• Owner may be subject to self-employment taxes on all of business's net profits (computed on Schedule C and Schedule SE of annual income tax return).
• Need to make quarterly estimated tax payments.
• If employees are hired, a Federal Employer Identification Number is needed. This number is obtained by filing a Form SS-4 Application. This form may be obtained by calling the IRS at 1-800-TAX-FORM.
• Payroll taxes will need to be paid on employees.
• If business is sold, gain or loss must be computed on each item of the business.
• Intangible assets such as patents and copyrights are considered assets of the business, separate gain or loss is computed on these items.

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