Sole Proprietorship and Investment Accounts

By Jeffry Olson, J.D.

Sole Proprietorship and Investment Accounts

By Jeffry Olson, J.D.

A sole proprietorship is one of the most common forms of business in this country. The owner can operate their sole proprietorship in their name or an assumed name, using a doing business as (DBA) filed with the appropriate jurisdiction. A sole proprietorship offers the owner freedom to operate his or her own business as well as make investments, such as those through an investment account. Business owners frequently use these accounts as a savings account for the business, to make other investments to supplement the income of the business, or as a retirement account.

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Sole Proprietorship Basics

A sole proprietorship is a form of business operated by a single owner. It may conduct any business legal in the jurisdiction. It is also the default form of business when an owner begins operation of a business alone and without filing any paperwork with the state. It is distinct from a partnership, which has two or more owners. Further, it is not a separate legal entity, such as a corporation or limited liability company (LLC). Rather, it is an extension of the owner used for the operation of the business. With fewer legal requirements than other forms of business, a sole proprietorship is the simplest form of business to establish and operate.

Ownership and Taxes

The owner of the sole proprietorship owns all assets of the business and holds the assets in his or her name. Similarly, all income of the sole proprietorship is taxed as income to the individual owner. This includes income earned by investment accounts. Taxation for a sole proprietorship is sometimes referred to as flow-through or pass-through taxation. In addition, the investment accounts are titled in the name of the owner. Conversely, an LLC or corporation is a separate legal entity from its owners, so it may own property in its own name and be taxed separately as well, depending on accounting decisions made by the business.

Liability

The primary disadvantage of a sole proprietorship is a lack of liability protection. Unlike a corporation or LLC, the assets of the owner of a sole proprietorship are at risk for any debts or liabilities of the business. This applies to investment accounts as well. Any losses incurred in by the investment account are the legal responsibility of the business owner.

Retirement Accounts

A sole proprietorship may choose to establish an investment account for the purpose of retirement. The three most common types of investment accounts for retirement for a sole proprietorship include a solo 401(k), a simplified employee pension (SEP), and a simple IRA.

A solo 401(k) is a common choice for a sole proprietor seeking to maximize his or her contributions to a tax-deferred retirement account. Contributions are tax deductible and tax deferred.

An SEP is best for high-income business owners seeking to maximize retirement contributions with an uncomplicated plan that has low fees. SEPs are similar to IRAs.

Simple IRAs are best for individuals who have limited self-employment income, typically $30,000 or less.

Always consult with a tax professional prior to creating a retirement account for your sole proprietorship.

Sole Proprietorship and Investment Accounts

A sole proprietorship may make any investment available to an individual, including investment accounts. In this situation, the investment account is in the name of the business owner and any income is taxed to the individual. Be aware, sole proprietorships do not offer the liability protection that corporations or LLCs provide. Sole proprietorships may also establish an investment account to act as a retirement account for the owner.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.