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Just as the name implies, the sole proprietorship form of business entity has only one owner - the "sole" or single proprietor. As such, it is the easiest to form, since it begins automatically when one person decides to do business and lasts until the end of the business or the death of the person. Since there are no organization papers to file with federal or state agencies, this business structure is also very inexpensive to form. Check with your local city or county governments since they may have requirements to file a "fictitious business" statement or a "D.B.A. - Doing Business As" statement. In either case, the filing fee for either of these statements is probably less than $70.00.

The legal liability for the acts of the business falls upon the shoulders of the sole proprietor. The proprietor can insure against the financial detriment for successful lawsuits against the business for accident, errors and omissions, and product or workmanship damages. If the exposure for liability is extremely high, working with toxic materials, for example, insurance coverage may be limited or to costly. If insurance protection against business risks is not practical, then consider using the corporate form of business.

However, even if one can insure against business risks there is no insurance to insulate oneself against creditors. Creditors can pursue the personal non business assets of the proprietor for the settlement of business debts.

For example, assume the business purchases $5,000 worth of pocket calculators on credit, for resale to customers. The business sells the calculators for $10,000, a tidy profit, but uses the money to pay for rent, office supplies, and employees. The creditor doesn't get paid and ultimately sues to recover the $5,000. Since the business is a sole proprietorship, the creditor can pursue the collection of the debt from the owner personally. This means the possibility of wage garnishments, levies on bank accounts, and seizure of property.

The income tax effect of this form of business is reported in the sole proprietors individual income tax return - Form 1040. Within the 1040 is a Schedule C "Profit or (Loss) from Business" which includes all of the business income and expenses. Additionally, if income is greater than $400, a Schedule SE must also be included. Since the business income is taxed on the sole proprietors tax return, the tax bracket of the proprietor applies to the business income. Other business forms - corporations - have their own tax and tax brackets apart from the owners.

Before you determine whether you should use the sole proprietorship form of business take a look at the other business forms available to you.

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