Introduction

There are many sources, both professional and not, that claim that the sole proprietorship is the simplest of all the business organizations. They say that it is the simplest because of the ease of the process of taxation, the lack of paperwork and legal requirements, and the affordability of this business option. Of course you want to know for sure if these claims are true. Perhaps the U.S. Department of Commerce can help to clear up any questions that you may have regarding these claims. The U.S. Department of Commerce states that, "A sole proprietorship is the easiest and least expensive way to start and operate a business.There is no specific legal filing requirements for sole proprietors who are doing business under their own names. Since the business is owned by one person, the owner has total control of the operation. The business has no existence apart from the owner."

It is a fact that the sole proprietorship is the oldest, most common, and simplest form of business organization there is. In fact, there are those currently operating a sole proprietorship without even realizing that they are doing so. A sole proprietorship is a business entity owned and managed by one person. This is generally the way that most small businesses begin. There is no formal organization that a sole proprietor must create nor are there laws that dictate how the sole proprietorship must operate (with the exception of course of remaining within the limitations of the law).

The one most crucial aspect of being the owner of a sole proprietorship is recognizing that the owner is inseparable from the business. On the positive side, the owner of a sole proprietorship has complete control over the business and its operations. On the other hand, the owner is also financially and legally responsible for all debts and legal actions against the business, even if it means the seizing of personal assets in order to pay the debts of the business.

Forming a sole proprietorship; the basics

The best way to see for yourself that a sole proprietorship really is the simplest business organization; you will need to go through the steps of forming your own. Naturally it is intimidating to begin this process on your own; after all, there is a lot at stake when it comes to forming your own business. This is something that you will want to take seriously. Remember that even though a sole proprietorship may be simple to form in comparison to other business structures, it is not necessarily a completely effortless process. You may have to comply with local registration, business license, or permit laws to make your business legitimate. Below you will find a brief outline of the steps that you will need to take as you form your sole proprietorship. Following these four steps will help to ensure that your business is in compliance with applicable laws. To be sure that you are in complete compliance, you will need to review your specific state requirements.

1. Choose and register your business' name

You will need to have a name for your business before you start filling out any tax forms or registering that name. Usually you will not need to register a sole proprietorship business name if your own name is part of the title. You may want to check just to make sure that there are not other local businesses operating under the same business name as you. If the name of your business is something other than your own name it will need to be registered as a fictitious or assumed name (also called a trade name). Fees and procedures for registering your business name may vary from location to location, so you should contact your county clerk's office for specific information. Even though it is not required, you may also want to file for your business name to be trademarked.

2. Obtain licenses

There are few if any federal or state licenses that are required for a sole proprietorship to have in order to operate in a particular trade. However most local or city governments require that every business to obtain a basic business license (this is also known as a tax registration certificate). Again, fees and information will vary from location to location so it is best that you contact your county or city clerk's office or other local government authority to obtain the information that is specific to your situation.

3. Understand your tax obligations

You will want to make sure that you are on top of any tax requirements that are applicable to your business situation. If you have an employee or employees, you need to apply for an Employer Identification Number as well as obtain a state employer identification number or account for tax purposes. All owners of sole proprietorships are subject to additional federal and state taxes and informational filing requirements, such as self-employment taxes and employment withholdings and filings. In most cases, you can include your business expenses and earnings on your standard tax form, but depending on the operational details of your business you may be required to file additional forms. You may want to consult a tax professional or visit the IRS site to obtain more detailed information.

4. Establish a business account

For the sake of organization it is best to keep your personal bank account and the account used for your business separate. You can easily do this by opening a business account at your local financial institution. Some banks will allow you to open a business account with nothing more than the name of your business (assuming that your name is also part of the business' name). Other banks may require your Social Security Number or EIN, a copy of your business name filing document, and your local business license in order to open and manage a business account.

Paying taxes on business income

Legally, a sole propriety is not a separate entity from the individual who owns it. Therefore, the owner of the sole proprietorship may simply report all business income or losses on his or her individual income tax return. This is usually reported on what is called the IRS Form 1040. Of course there are special considerations that require the filing of different forms, and you should investigate your specific tax needs on a case by case basis.

As a sole proprietor you will also have to take on the same responsibilities that an employer would (even if you are the only employee) by withholding and paying all income taxes on your own. These income taxes include what is called a "self-employment" tax, which consists of contributions to Social Security and Medicare, and pay estimated taxes throughout the year. Just to give you an idea of the tax forms that the owner of a sole proprietorship may need to file (again depending on individual circumstances) a list of federal tax forms that a sole proprietorship may need to file have been listed below:

Federal tax forms that a sole proprietorship may need to file

• Form 1040: Individual Income Tax Return (most commonly the only tax form that is required)
• Schedule C - Profit or Loss from Business (or Schedule C-EZ)
• Schedule SE - Self-Employment Tax
• Form 1040-ES - Estimated Tax for Individuals
• Form 4562 - Depreciation and Amortization
• Form 8829 - Expenses for Business Use of your Home
• Employment Tax Forms - In the case that there are multiple employees of the sole proprietorship.

Registering your sole proprietorship

Unlike more formal business structures such as an LLC or a corporation, under most circumstances you do not need to file any special forms to start working as a sole proprietor. You will also, generally, not be required to pay any fees. All that you will need to do is complete the general registration requirements that apply to all new businesses in the state that you plan on becoming the owner of a sole proprietor in (this is most commonly your state of residence). It is required, even for the smallest of sole proprietorships, that you register your business with the state and pay taxes on your income. In return for paying these taxes your business will receive a license to conduct business as well as a tax registration certificate. If you have employees, then your registration process will also need to include obtaining an employer identification number, a seller's license from your state, and a zoning permit from your local planning board. In some cases you will also be required to register the name of your business with the state county that it is in. This can generally be avoided if, as a sole proprietor, your name is part of the name you are choosing to do business under.

Personal liability; the main complication for a sole propriety

Usually owning and operating a sole proprietorship only becomes truly complicated when issues of liability arise. As the owner of a sole proprietorship, there is no delineation between your assets and the assets of your business. Likewise, your business debts and your personal debts are one in the same. This means that if for any reason your business is unable to pay its debts, the burden will fall on you personally, this means that a creditor can legally come after your house or other possessions.