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A sole proprietorship is a
legal business entity owned and operated by a
single individual or a married couple.
A sole proprietorship is also the easiest and
least expensive way to start a business online
and/or from home. In a sole proprietorship the individual who owns
and operates the business is personally liable
for all business debts as well. And all assets
of the business become personal property to the
owner.
Although a sole proprietorship is owned and
operated by an individual person, you can still
conduct business with a trade name other than
your legal name. This also allows you to open up
a business bank account in the name of your
business name. |
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As a sole proprietorship you are responsible to
file for income tax each year and you will be
taxed on the total income of the business minus
business expenses.
And filing for taxes is as simple as visiting
your local tax preparers’ office and letting
them do all the work or you can file for taxes
yourself.
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Filing for taxes
When filing for taxes as a sole proprietorship,
income that is earned by the business is seen as
income earned for the business owner as well and
must be reported on an IRS Form 1040.
Business expenses are claimed as deductions
against income for the year. And in a sole
proprietorship business which is run from home,
there are many things that can be written off as
business expenses, (when the expense pertains to
the business). This includes a portion of the
rent, utilities, purchases etc…
As a sole proprietorship you are taxed on all
net income of the business after business
expenses have been deducted.
However, if you’re going to use a portion of
that income to invest back into the business or
simply hold it as business capital then you may
want to consider forming your business as a
C-Corporation.
As a C-Corp, you can set aside unused funds as
capital for the business without being taxed on
those funds as earned income.
Yet investing in areas such as marketing for
your business can be added as a business expense
as well.
You can report income for your sole
proprietorship using a Schedule C which is
attached to your annual 1040 form. And by filing
as a Schedule C you may be able to obtain
business deductions for losses as well.
Yet if your business is a small business with
low earnings then you may be able to file income
using a Schedule C-EZ form. And to do so, your
business must meet the following conditions:
1- Gross receipts of less than $25,000.
2- Claimed business expenses of less than
$2,500.
3- No inventory.
4- No employees.
5- Cash accounting methods are utilized.
6- No depreciation of assets is claimed.
7- No overall loss is being claimed. |
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Advantages of a sole proprietorship:
Easy start up, low costs, fewer regulations, and
individual decision making are all advantages of
forming your business as a sole proprietorship.
Filing for taxes is a
simple process as well. Furthermore, you will
not be taxed with a double taxation, as you
would be taxed with a corporation.
When operating as a sole proprietorship, the
profits of the business go to the owner of the
business and no one else.
As the sole owner you’re able to make and carry
out business decisions right there and then
without having to check with anyone.
You are in control of your business, all of the
time. And you won’t have to deal with any
disagreements with partners as there are no
partners involved within a sole proprietorship.
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Disadvantages of a
sole proprietorship:
One disadvantage of forming your business as a
sole proprietorship is the ability to raise
capital if capital is needed.
If capital becomes a necessity for any reason
then it may become difficult to raise or borrow
such capital as a sole proprietorship.
Furthermore, you as the sole owner of a sole
proprietorship take on all liability for
business debts, profits and losses as well.
Yet as your business grows, and earnings
increase, then risk also becomes a factor. And
the more your business grows then the more
valuable your business becomes.
Yet you can minimize such risk by transforming
your business into a corporation or a limited
liability company. However, there is no reason
to worry about such risk for now, nor in the
future.
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Registering a sole proprietorship
business
You can register a sole
proprietorship business just by registering your
business name. And you can register your
business name with your state or county clerks’
office.
Contact your county
clerks’ office to request forms, fees and
procedures. Fill out the forms and send them
back in with the correct filings fees.
Once your business name is
registered, then your business becomes
registered and established as a sole
proprietorship as well.
You may also be required
to place an ad in your local news paper
publicizing the use and ownership of your new
business name.
Then (in most states) you
must submit proof of your publication to the
county clerks’ office in order to complete the
process of registering your business name.
Then you will receive a
certificate in the mail as proof of business
ownership.
Easy set up and low
start-up costs are the main reasons why there
are over 20 million sole proprietorship
businesses in the United States today.
Starting a business as a
sole proprietorship is recommended for most
beginners due to such simplicity and advantages
as well. And that’s why starting your business
as a sole proprietorship may be the best way for
you to go. |
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Corporations Explained |
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Partnerships Explained |
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Limited Liability Companies Explained |
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