The sole proprietorship is is the most common and simplest form of business organization, and therefore the most popular. A sole proprietorship is a business run by one individual that has no legal distinction from its business owner. The business owner has full managerial control and does not need to take any formal action to create the business; in fact many people operate as sole proprietorship’s without even knowing they are operating as a sole proprietorship, such as freelance writers.
If a business owner desires to operate his or her business under a name other than the name of the business owner, the business owner must file a DBA (doing business as) form with the Idaho secretary of state of the state, or any other states that the business operates in. The business will need to use a name that is not already in use by another person or business entity. Income and expenses from the business will be included on the business owners individual income tax return (Form 1040). Profits and losses from the business are first recorded on Schedule C and the “bottom line amount” from Schedule C is transferred to the business owner’s Form 1040.
If a business owner operates his or her company as a solo business owner, that is without any partners or other business owners, then the business owner’s default entity selection is the sole proprietorship.
Operating as a sole proprietorship can be attractive to many business owners from a tax standpoint because business losses the business owners have may offset income earned from other sources of the business owner. Moreover, a business owner that operates as a sole proprietorship does so under the business owner’s own social security number, and does not have to obtain a separate tax identification number for the business. Note that it is a sole proprietor’s responsibility to file all other necessary tax forms for the business, such as Schedule SE used to calculate self employment tax, and to make any required estimated tax payments the business may owe. However, there are also drawbacks to operating as a sole proprietorship. The business owner is personally liable for all financial obligations of the business, and the business owner’s personal assets may be seized to satisfy a business debt or legal claim filed against the sole proprietorship. It can be more difficult to raise funds for a sole proprietorship, as there is no stock, units or partnership interests of the business to sell and banks may be reluctant to lend to a sole proprietorship money because of a lack of perceived credibility. The sole proprietorship also terminates at the business owner’s death, so there is no way to pass the business owner’s interest to the sole proprietor’s heirs or employees.