The sole proprietorship (sole means only you) is the simplest form of business structure and is probably the most used.  From a legal perspective you and your company are the same.  Establishing a sole proprietorship takes little effort.  There are no formal filings, except you may need to get a business license, a sales tax license or a permit.  If you use a fictitious name you will need to file that name.

From an income tax standpoint the business and the owner are one entity so business income and losses are filed on a Form 1040 with a Schedule C.  Losses can be used to offset income.  Since you are considered one entity, all assets are exposed equally to either business or personal legal action.  If you believe that you have a business that may have value and that you may want to sell in the future, the sole proprietorship makes any sale difficult. Also, if you think you will need to bring in equity funding it would be virtually impossible with a sole proprietorship.

The Sole Proprietorship structure offers advantages to the self-employed individual:

• Simplest structure – less paperwork and maintenance
• Single taxation on your individual return
• Comparable expense deductions and retirement funding

Disadvantages of a Sole Proprietor are:

• Unlimited business and personal exposure
• Full FICA (Social Security) and Medicare taxes
• Some IRS audit exposure to Schedule C deductions
• No other owners and difficult outside funding

We explain all of these points in greater detail in additional subject matter below. Also review the options of a Limited Liability Company, a C corporation, and an S Corporation.

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