Sole Proprietorship

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Sole Proprietorship

A form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation.

A person who does business for himself is engaged in the operation of a sole proprietorship. Anyone who does business without formally creating a business organization is a sole proprietor. Many small businesses operate as sole proprietorships. Professionals, consultants, and other service businesses that require minimum amounts of capital often operate this way.

A sole proprietorship is not a separate legal entity, like a partnership or a corporation. No legal formalities are necessary to create a sole proprietorship, other than appropriate licensing to conduct business and registration of a business name if it differs from that of the sole proprietor. Because a sole proprietorship is not a separate legal entity, it is not itself a taxable entity. The sole proprietor must report income and expenses from the business on Schedule C of her or his personal federal income tax return.

A major concern for persons organizing a business enterprise is limiting the extent to which their personal assets, unrelated to the business itself, are subject to claims of business creditors. A sole proprietorship gives the least protection because the personal liability of the sole proprietor is generally unlimited. Both the business assets and the personal assets of the sole proprietor are subject to claims of the sole proprietorship's creditors. In addition, existing liabilities of the sole proprietor will not be extinguished upon the dissolution or sale of the sole proprietorship.

Unlike the managers of a corporation or a partnership, a sole proprietor has total flexibility in managing and controlling the business. The organizational expenses and level of formality in a sole proprietorship are minimal as compared with those of other business organizations. However, because a sole proprietorship is not a separate legal entity, it terminates when the sole proprietor becomes disabled, retires, or dies. As a result, a sole proprietorship lacks business continuity and does not have a perpetual existence as does a corporation.

For working capital, a sole proprietorship is generally limited to the individual funds of the sole proprietor, along with any loans from outsiders willing to provide extra capital. During her lifetime, a sole proprietor can sell or give away any asset because the business is not legally separate from the sole proprietor. At the death of the sole proprietor, the business is usually dissolved. The proprietor's estate, however, can sell the assets or continue the business.

Cross-references

S Corporation.

sole proprietorship

n. a business owned by one person, as distinguished from a partnership or corporation.

References in periodicals archive ?
When it comes to sole traders and partnerships, there is no legal distinction between the owner and the business, which means any charitable donations made will be treated as if they were personal.
It follows a survey completed by 130 sole traders and businesses last year.
For mortgage purposes you are classed as self-employed if you own 25 per cent of a business or more, meaning that sole traders, partners within a partnership and limited company directors will typically fall into this category.
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As a role, non-EU-citizens on a B-permit cannot start an 'Einzelfirma' (sole trader) unless they have a special permission from the cantonal work permit authorities.
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Instead, he's fronting his new business as a sole trader.
The questions help determine whether a sole trader, partnership or company structure is likely to be more suited to their business.
At gov.uk/topic/business-tax/selfemployed you will find links to all sorts of help in getting yourself set up, from writing a business plan to setting up as a sole trader, registering for and filing a self-assessment tax return, plus help with tax and National Insurance.