What is a Sole Proprietor? – Master of Accounting Degrees

Entrepreneurs looking to start their own business may have heard the term sole proprietor and want to know its exact meaning. At its most basic, this term is used when only one person owns and operates a business. This term and the corresponding type of business organization will be outlined in detail below.

Anyone Who Makes Money From A Business

Anyone who makes money from an entrepreneurial venture is a sole proprietor. This can be as simple as a stay-at-home mom selling crafts online or as involved as an independent construction business. This makes it the most common type of business organization in America. Entrepreneurs do not necessarily have to set up a company, hire employees or possess a business license. Sole proprietors can hire employees and there is no limit on how many. Owners must comply with all relevant employment laws if their business has employees. Sole proprietors must also pay income tax, self-employment tax and estimated tax according to the Internal Revenue Service (IRS).

Their Business Is Not A Separate Entity

In a sole proprietorship, the business is not a separate legal and taxable entity from the individual. Instead, owners report and pay taxes on all revenue on their personal income taxes. This does mean that sole proprietors are personally liable for their business. Anyone pursuing legal action against a sole proprietorship is in effect pursuing legal action against the individual owner, which is a drawback to this type of business organizational structure. Sole proprietorships often do not have Employer Identification Numbers (EIN), although they can. Instead of an EIN, the individual’s social security number is used for tax identification purposes.

Comparison To Other Types Of Business Organization

Sole proprietorships are only one of several types of business organization. Other organizational structures include partnerships, S-corporations, limited liability corporations (LLCs) and C-corporations. Partnerships are similar to sole proprietorships with the major difference being that they have more than one owner. LLCs are a hybrid model that provides liability protection for their owners but don’t have many of the same requirements that S- and C-corporations do. S-corporations and C-corporations are fully registered corporations that are separate entities. S-corporations are less complex than C-corporations. Entrepreneurs unsure what structure is best for their business are advised to consult a business attorney.

Sole Proprietorship Startup Steps

Even though setting up a sole proprietorship is as simple as beginning to exchange goods and services for money, entrepreneurs should still follow some basic steps. In a sole proprietorship, it is not necessary to establish a separate business name, although it may be wise. Entrepreneurs need to set up a separate business checking account into which all revenue will be deposited. Keeping personal and business accounting separate is critical if the business is ever audited and it makes tallying income and expenses during tax time substantially easier. Depending on the business’s industry and scope, entrepreneurs may need to formally register their business in their state or obtain professional licensure. Sole proprietors also may need various forms of business insurance, such as liability and worker’s compensation.

Fortunately, sole proprietorships are easier to understand than other types of business organizations because they are the most basic. This makes them a common and popular choice for entrepreneurs. Becoming a sole proprietor is the easiest and simplest way to become an entrepreneur and start a business.