Legal Issues for Sole Proprietorships

By Maggie Lourdes

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.

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.

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.

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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.

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How to Open a Sole Proprietorship

References

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What Is Bad About Proprietorship?

A sole proprietorship refers to a business owned and operated by one person who hasn't made a legal entity selection and filed with the state such as a corporation or limited liability company. Although a sole proprietorship is the easiest and least expensive type of business entity to set up and run, it does have a number of drawbacks not present with other entity choices.

How to Set Up a New Sole Proprietorship in Indiana

Sole proprietorships are owned by a single individual who operates the business as an extension of his personal affairs. In Indiana, sole proprietorships and general partnerships are classified as informal associations; they are not required to file formation documents with the secretary of state to obtain permission to do business. A sole proprietor, such as a professional photographer, can start his business and operate it within the state at his own discretion. However, if a sole proprietor wants to use an assumed business name, operate in a state-regulated industry, collect sales taxes, hire employees or is located in certain areas of the state, he may have to submit special registrations to conform with requirements in those areas.

Steps to Starting an LLC

A limited liability company (LLC) is a business that is owned and usually operated by its members. An LLC shields its members from personal liability. This means company debts do not generally put the members' personal wealth at risk. An LLC may own, buy or sell assets, enter contracts, file and defend lawsuits, hire employees and file tax returns. Limited liability companies are subject to the individual laws for the states in which they do business.

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