What is a Sole Proprietorship?

What is a sole proprietorship?  By definition a sole proprietorship is a business with a single owner.  Thus, there are not multiple partners, shareholders or individuals working together for a profit such as with a partnership or corporation.  I am surprised at how often I see individuals operating as sole proprietorship and I have seen individuals making $200,000 to $500,000 per years as a sole proprietorship!  It is not that the type of entity can help you make more money but rather, I always assumed with making such money, the individual would want to more structure and liability protection.  The article below has been drafted by a business attorney to provide some information regarding a sole proprietorship.

Within a sole proprietorship, the individual is the business and the business is the individual, there is no separate entity formed with the secretary of state.  In its simplest sense, the individual just starts operating the business.  Although this make a sole proprietorship simple and may be considered an advantage, there are disadvantages.  The proprietor is personally responsible for all debts and liabilities of the business.  Thus, the proprietor could be exposed to significant amounts of liability, especially depending upon the industry the proprietor is in.

From a tax perspective, a sole proprietorship does not file its own tax return, but rather the proprietor will prepare and file a Schedule C with their 1040 Individual Income Tax Return.  The proprietor will pay self employment tax on the net income of the business, which is calculated on a Schedule SE.  It is also interesting to note that a single member limited liability company (LLC) is considered a disregarded entity for tax purposes and thus the single member of an LLC will file a Schedule C with their 1040 tax return as opposed to a 1065 partnership income tax return.  The single member LLC may still receive limited liability in terms of liability protection, but in the eyes of the IRS, the single member is treated as a sole proprietorship.

In short, the defining characteristics of a sole proprietorship are that there is a single owner, no forms are filed or organized with the secretary of state and the proprietor is liable of the debts and liabilities of the proprietorship.

If you are considering forming a business or are looking at the entity structure of your current business, speak with a Denver business attorney and tax attorney at The McGuire Law Firm.  An attorney can assist your entity choices and discuss the tax implications of choosing a certain entity over another.  Further, a business attorney can assist you with the drafting of contracts, contract negotiations, the sale of your business or business assets and other business matters.

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