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 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.

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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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