Legal Issues for Sole Proprietorships

by Maggie Lourdes
Before opening your business be sure to have any needed license or permit.

Before opening your business be sure to have any needed license or permit.

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A sole proprietorship is a type of business entity owned by one person. Because sole proprietorships are not registered with the state, opening a business as a sole proprietorship is generally fast and easy. However, each state has its own laws regarding local registration, business licenses and permits. It's a good idea to consult an attorney or online document preparation website before operating a business as a sole proprietorship.

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A Sole Proprietor's Liability

A sole proprietor is personally liable for his business debts. For example, if Jane owns a home in her name and also runs a bakery as a sole proprietor, if the bakery is sued, the lawsuit places Jane's home at risk. This is different from a corporation or LLC. Generally, the owners of an LLC or corporation are not personally responsible for business debts. The fact that a sole proprietor is not individually shielded from business obligations is a disadvantage.

Taxation Facts

A sole proprietor claims all business income or losses on his personal tax return. Generally, a schedule C form is used with a 1040 tax return to claim business profits and expenses. A sole proprietor must pay income tax, self-employment tax, Social Security and Medicare in proportion to the income he draws from his business. Because tax regulations, rates, allowable deductions and tax liabilities constantly change, a sole proprietor may want to consider having his taxes reviewed each year by a tax specialist. A sole proprietor must also keep careful records to ensure that business expenses are kept separate from personal expenses.

Inheriting Sole Proprietorships

A sole proprietor's business assets are part of his personal estate. When a sole proprietor dies, all business money, equipment, real estate, leases and any business property pass to her individual heirs. A sole proprietor should have a will, trust, or name beneficiaries on business financial accounts to ensure business assets pass on death hassle free. A sole proprietor may operate his business under a fictitious name called a DBA, which stands for "doing business as." Using a DBA does not impact the fact that business assets remain part of a sole proprietor's personal estate.

Licensing and Regulations

Generally, no special regulations or licensing govern sole proprietorships. However, sole proprietors must be licensed if they operate in a regulated profession or industry. For example, a sole proprietor who practices law must be a licensed attorney in his state. A sole proprietor who runs a restaurant will require a business license, a liquor license and local permits. A sole proprietor should check his state's regulations to determine if his business activities require state testing or licensing.