Sole Proprietorships Are Easy to Establish and ManageSole Proprietorship examples include small businesses, such as a single person art studio, a local grocery, or an IT consultation service. The moment you start offering goods and services to others, you form a Sole Proprietorship. It's that simple. Legally, there is no distinction between you and your business. While there are no filings necessary to register your company, you will have to apply with the Internal Revenue Service to obtain an Employee Identification Number if you set up a retirement plan or start hiring employees. Otherwise your Social Security number can be used instead. Of course, you will also have to possess all the necessary local and state permits and licenses related to the business you operate, though they are not necessary for forming a Sole Proprietorship, just to make sure you are doing business legally.
It's Important to Weigh Simplicity vs. Liability Protection
The key advantage of forming a Sole Proprietorship is its simplicity. As you are the sole owner, no distinction is made between you and your business; you make all the decisions without any shareholders or co-owners to consult, and you pay taxes as normal, incorporating the profits from your venture as your revenue on the tax forms. Of course, this has its disadvantages, as you are personally liable for the debts your business incurs. That means if you fail to pay up on time, debt execution may be carried out on your personal property, up to and including your house. If someone sues your business, you'll also be personally liable.
It's best to carefully weigh the pros and cons when deciding which type of business entity to set up—for example, you can choose between a Sole Proprietorship or Partnership, or an entity that offers liability protection (like an LLC, S-Corp, or C-Corp). Remember that each type has distinct tax and liability implications. In many cases, the default Sole Proprietorship form may not be the best option for your situation. Ask a lawyer which business entity is right for you, or learn more about incorporating.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.