Lone wolf: What is a sole proprietorship?

The internet is full of blogs fully dedicated to building and running a profitable business.  I read these posts every day.  So far, however, I haven’t seen a post explaining how easy it is to start your own business.  Here goes.

Starting a sole proprietorship in the United States involves almost no action.  It happens by itself.

For example, suppose I mow my neighbor’s lawn.  He gives me $5/week.  Wham.  That’s a sole proprietorship.  It just happens.

Serious, relaxed and fluffy wolf
Serious, relaxed and fluffy wolf
by Tambako the Jaguar, on Flickr

You should know that a sole proprietorship is not a partnership.  It is owned by just one person.
Furthermore, a sole proprietorship is not a corporation.  A corporation requires incorporation with the state.

The primary advantage of a sole proprietorship is that it is so easy to set up, that it happens by itself.  The primary disadvantage is that a sole proprietor (someone who owns a sole proprietorship) has unlimited liability.  This means that the owner is personally responsible for any debts of their business.  For example, if you run your blog as a sole proprietor, then you are personally responsible for any debts of the blog.  If your blog gets sued, your own personal money is on the line.

Sole proprietors pay taxes on their business income as if it were personal income, and report it on their own personal tax return.  Their tax return includes something called a Schedule C or C-EZ.  On this form, they report their income and can deduct many business-related expenses.

Tax trivia: All income is taxable unless the tax rules exempt it.  Therefore, income from illegal sources (such as drug-dealing, gambling, and prostitution) must be reported on a tax return, usually as part of Schedule C.

About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

Trackbacks/Pingbacks

  1. Dividends explained « Accountinator - May 22, 2012

    […] of profits to stockholders.  Corporations pay dividends; dividends paid by partnerships and sole proprietorships are called “withdrawals” or […]

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