Business Structures: Sole Proprietorship

Sole Proprietorship

Last revised: February 8, 2018 

When you’re first starting your business, you’ll have to choose a business structure. The easiest and cheapest business structure to choose is a sole proprietorship.

As a sole proprietor, you can either operate your business under your given name or under a “Doing Business As” (DBA) name. If you choose to operate under a DBA, you’ll have to register it with your county and/or state.

You’ll also have to get any local licenses required.

Tax Obligations

A sole proprietorship is a business that legally isn’t separated from its owner.

Income Tax

All the profits or losses from the business pass through to the owner and are reported on their personal income tax return.

To report your profits or losses, you’ll file Form 1040, U.S. Individual Income Tax Return and Schedule C (Form 1040), Profit or Loss From Business or Schedule C-EZ (Form 1040), Net Profit From Business.

For tax year 2017, these forms are due by April 17, 2018.

Self-Employment Tax

As a sole proprietor, you’re subject to the self-employment tax. The self-employment tax is social security and Medicare taxes for people who work primarily for themselves.

You’ll pay 15.3% in self-employment taxes – 2.9% for Medicare and 12.4% for social security. You’ll only pay social security tax on the first $128,400 you make.

To determine how much self-employment tax you owe, file form Schedule SE (Form 1040).

Quarterly Estimated Taxes

You must also pay quarterly estimated taxes, if

  • you expect to owe $1,000 or more in federal taxes, and
  • your withholding will be less than the smaller of
    • 90% of the tax shown on your current year’s tax return or
    • 100% of your previous year’s tax return.

You can calculate and pay your estimated taxes using Form 1040-ES, Estimated Tax for Individuals.

Pros of Starting a Sole Proprietorship

  • A sole proprietorship is the easiest and cheapest business structure to set up.
  • You only pay unemployment tax on your employees, not yourself.
  • There are few, if any, ongoing formalities (like board meetings) to follow.
  • You can mix business and personal assets, if needed.
  • You have complete control over your business and can unilaterally make decisions.

Cons of Starting a Sole Proprietorship

  • You are personally responsible for any debts, losses, or other liabilities of the company. If your company incurs a debt that it can’t pay, you run of the risk of losing your personal assets.
  • Sole proprietorships have a short lifespan. They rarely survive the death or incapacity of the owner.
  • Because you can’t issue equity and often only have personal assets to leverage for bank loans, it can be difficult to raise capital through established channels.

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