SOLE PROPRIETORSHIP
Characteristics of the sole
proprietorship business
A Sole Proprietorship is the
simplest form of business, it is a business owned by one (1) person and has no legal distinction
from the owner. There are no formalities required in sole proprietorship
aside from a few licensing requirements like the filing of a fictitious
business name statement which discloses the business name as well as the
name and address of the owner.
The advantage of sole
proprietorship is that the owner has total management and control over the
company. However, the sole proprietorship's disadvantage is that the owner's
personal assets are at risk for liabilities incurred through the acts of the
owner and the owner’s agents or employees.
Even with a fictitious name a sole proprietorship, cannot be considered an entity
separate from the owner. Rather, a sole
proprietor directly owns the business and is directly responsible for its
debts. In a sole
proprietorship, the owner is personally liable for the company and has
unlimited personal
liability for loss, thus placing all their personal assets and wealth at
risk. If an owner is married,
the owner puts the community property at risk as well.
How is a sole proprietorship taxed?
Unlike a corporation, a sole proprietorship is not considered separate from
its owner for tax purposes. This means the sole proprietorship itself does
not pay income tax; instead, the owner reports business income or losses on
his/her individual income tax return. Note that all business income is taxed
to the owner in the year the business receives it, whether or not the owner
removes the money from the business
A sole proprietor will have to take responsibility for withholding and
paying all income taxes,
which an employer would normally do. This means paying a “self-employment”
tax (over
15% on the first $84,000), which consists of contributions to Social
Security and Medicare,
and making payments of estimated taxes throughout the year.
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