A sole proprietorship is a business owned and operated by a single person. There are a number of legal and tax factors to consider when operating a sole proprietorship. There are no documents to file with the state when a business owner wants to start a sole proprietorship.
Liability
A sole proprietorship and the owner of the business are one and the same, since a sole proprietorship is not a separate entity from the business owner. Since there is no separation between the business and its owner, a sole proprietor is personally liable for all obligations and liabilities incurred while operating the business. Business creditors may seize the owner's personal assets if the company's assets are not sufficient to cover the business debts. Personal creditors of a sole proprietor may pursue assets from the business if the business owner is unable to meet his personal obligations.
Taxes
Sole proprietors are not required to file taxes with the Internal Revenue Service (IRS) as a business. Owners of a sole proprietorship report business losses and profits directly on their individual or joint income tax return. The profits received as a result of operating the sole proprietorship are taxed at the business owner's personal income tax rate. In addition, a sole proprietor can use losses from the business to offset income gained from other sources, according to the Reference For Business website.
Control
A sole proprietor controls every aspect of the business. There is no other partner or shareholder with whom to share the profits, and there is no requirement to separate the owner's personal income from the profits the business generates. Sole proprietors are allowed to use income from the business in any manner. Decision making responsibilities are in the hands of a single person, which may allow the business owner to react faster to changes in the market. The negative side, though, is that sole proprietors lacking financial expertise in areas like budgeting may cause the business to suffer due to poor decision making.
Drawbacks
Sole proprietorships have a much harder time raising capital than other business entities. Sole proprietors cannot sell ownership shares or offer stock as a means of raising operating capital. Therefore, a sole proprietor has to rely on the company's assets to raise money for expansion or to meet existing obligations. A sole proprietor in the infancy stages may have to rely on personal credit to get business loans. Another thing to consider is a sole proprietorship's limited existence. When a sole proprietor sells the business, retires or dies, the sole proprietorship terminates.
