A sole proprietor is an individual person who operates a business in his or her own name or under an assumed name. The person’s own social security number serves as the tax identification number of the business and, consequently, the individual simply reports the business’ income on his or her personal return. The sole proprietor pays quarterly estimated taxes, as opposed to filing more complicated payroll tax returns and withholding periodic taxes from money earned.
The advantages of this type of business entity are efficiency and cost. Obviously, the cost and organizational time are minimal. The main disadvantage of this entity choice is lack of liability protection. Any problems that may arise in the course of business will pass directly to the owner personally, without the ability to insulate personal assets from liability issues. There are also several important tax matters that may arise as the proprietor’s business develops.
Those considering a sole proprietorship need to be advised of the legal and tax implications of conducting business in this manner. Consulting with an attorney and tax advisor is highly recommended prior to commencing business activities as a sole proprietor.