Next video:
Loading the player...

A sole proprietorship is an unincorporated business that has one owner who pays the taxes on the profits of that business. Sole proprietorships require very little paperwork beyond such things as business name registrations and filing for sales tax and occupancy permits.

Because of its ease of use, a sole proprietorship is popular for independent contractors, small business owners and those individuals who run a part-time or side business.  If the sole proprietorship has employees, the owner can usually obtain a federal Employer Identification Number.

Since there is no separate legal entity under which the business is operated, the owner of the business is personally liable for all business debts, but also receives all the profits.

One disadvantage of a sole proprietorship is the difficulty of borrowing money or raising capital. In addition, most sole proprietorships are hard to sell and thus usually don’t survive the owner’s death or retirement.

If a sole proprietorship grows and proves to be profitable, the owner usually converts the business to a limited liability structure such as an LLC or a corporation. 

For tax return reporting purposes, most sole proprietorships are reported on Schedule C of the Individual Income Tax Return Form 1040. Schedule C is, essentially, a profit-and-loss statement for the sole proprietorship.  The owner pays tax on the net profits calculated on the Schedule C. A tax liability for a sole proprietorship is that the owner is subject to self-employment taxes.

Related Articles
  1. Small Business

    Which Type of Organization Is Best For Your Business?

    Learn the differences between the types of business organizations so you can determine how to best structure your business for tax and liability limitations.
  2. Small Business

    Should You Incorporate Your Business?

    Find out how becoming a corporation can protect and further your finances.
  3. Financial Advisor

    Understanding S Corporations

    This corporate structure is favored by many entrepreneurs, including financial advisors. Here's an overview of its advantages and disadvantages.
  4. Retirement

    Capital One Launches Small-Business 401(k) Plans

    Capital One Spark 401k joins growing list of retirement plan providers for small businesses.
  5. Taxes

    Taxes in Florida for Small Businesses: The Basics

    Learn why Florida's tax laws make it an attractive place to start a small business, and understand the types of taxes a small business owner must pay there.
  6. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  7. Taxes

    Taxes in Texas for Small Business: The Basics

    Learn the tax implications for small businesses in Texas, and discover how different types of small businesses, such as LLCs and S Corporations, are taxed.
  8. Small Business

    What is a Business?

    As a general term, business means the commercial activities of an individual or group engaging in some type of financial transaction.
  9. Taxes

    Taxes in California for Small Business: The Basics

    Understand the tax implications of running a small business in California, and learn which state taxes apply based on business type.
Hot Definitions
  1. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  2. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  5. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  6. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
Trading Center