Business, Legal & Accounting Glossary
A sole proprietorship is a business that one person owns, operates, and in many cases creates. It is the most common type of business organization. The sole proprietorship is also the simplest to start or terminate, the simplest to manage, the oldest, and subject to the least state or federal regulation. Freelancers and independent contractors frequently use the sole proprietorship form. Unlike limited partnerships and corporations, the sole proprietorship does not create a legal entity separate from the owner. However, profits from a sole proprietorship business are treated as the owner’s personal income and taxed accordingly. In addition, a self-employment tax is assessed by the IRS on the net income of the sole proprietorship. The owner of a sole proprietorship is also personally responsible for all debts or other liabilities incurred by the business and can be driven into bankruptcy if the sole proprietorship goes bankrupt. Finally, a sole proprietorship may have more difficulty obtaining a bank loan or line of credit than other forms of business. For that reason, the owner of a sole proprietorship may choose to transition into a limited liability company (LLC), S Corporation, or other forms of business structure, if the business is successful and grows.
He runs his three small restaurants as a sole proprietorship as he doesn’t feel he needs the liability protections offered by incorporation.
Many small businesses are sole proprietorship, at least in the beginning.
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This glossary post was last updated: 14th February, 2020