A Brief Description Of The Sole Proprietorship

A sole proprietorship is the business or an individual who has decided not to carry his business as a separate legal entity, such as a corporation, partnership or limited liability company. The proprietorship business type is not a separate entity. Any time a person regularly provides services for a fee, sells things at a flea market or engage in any business activity whose primary purpose is to make a profit, that person is a sole proprietor.

If they carry on business activity to make profit or income, the IRS requires that you file a separate Schedule C “Profit or Loss From a Business” with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship business activity.

As the sole proprietor of a business, you have unlimited liability, meaning that if your business can’t pay all it is liable for, the creditors to whom your business owes money can come after your personal assets. Many part-time entrepreneurs may not know this, but it’s an enormous financial risk. If they are sued or can’t pay their bills, they are personally liable for the business incurred expenses and liabilities.

A sole proprietorship has no other owners to prepare financial statements for, but the proprietor should still prepare these statements in order to keep abreast of how his business is doing. Banks usually require financial statements from sole proprietors who apply for loans. And a partnership needs to maintain a separate capital or ownership account for each of the partners.

The total profit of the firm is allocated into these capital accounts, as spelled out in the partnership agreement. Although sole proprietors don’t have separate invested capital from retained earnings like corporations do, they still need to keep these two separate accounts for owners’ equity – not only to track the business, but for the benefit of any future buyers of the business.

The question you should ask yourself when planning to start a business of your own is, which business type affords me the most protection under the law? And the answer to this question is most assuredly the general corporation; but along with the protection it provides to you the business person (or CEO) comes the added responsibility of adherence to the law as well as your obligation to stock holders, if any. The decision could be an interesting one that may take some time to make.