A sole proprietorship is a business that has not incorporated and is owned by one person (no partners). A sole proprietorship may have an unlimited number of employees but there is only one owner. However, if there are employees in addition to yourself, you must apply for a Federal Employer Identification Number (FEIN) from the Internal Revenue Service. A FEIN is essentially a social security number for your business. You may apply for a FEIN even if you have no employees and use it to open a business bank account.
What are the characteristics of a Sole Proprietorship?
Sole proprietorships are not considered a separate legal entity and there is no legal separation between you as the sole proprietor and your business. You are financially responsible for all liabilities of your business and all of your personal assets are subject to seizure or lien by creditors. This is one of the major drawbacks to operating your business as a sole proprietorship.
As a sole proprietor, you are required to obtain an occupational license in the city and/or county where your business is located and comply with any other regulatory licenses required by your industry. If you are operating your business or trade under a name other than your personal name, you will also have to file for a Fictitious Name with the Department of State, Division of Corporations. There may be various tax filing requirements that you must comply with as well, such as Sales and Use Tax, Unemployment Compensation Tax and Worker’s Compensation. Those considering a sole proprietorship should consult a qualified tax professional for all tax-related concerns or questions.
Sole Proprietorship May Be Right For You If:
You are (and will continue to be) the only owner of the business – Sole Proprietorship, as the name implies, is a one-person operation. It’s not available for companies or businesses with more than one owner.
Your business or trade involves very little risk of liability (e.g., seamstress, housekeeper, writer, cobbler) – Sole proprietorship does not provide personal liability protection for business debts or in the event you are sued (e.g., for negligent acts or omissions, errors, breach of contract, slip and fall on premises, etc.).
You don’t want to file any business tax returns, but will report any income and/or losses directly on your personal tax return.
Next we consider the corporate form of Partnerships.