Understanding a Sole-Proprietorship
A sole proprietorship is a type of business that's owned and run by one person. Think freelance writers, independent landscapers or even YouTubers.
Key Takeaways
If you provide a service or product to someone by yourself and get paid without registering for any kind of business. You're considered a sole proprietorship.
With a sole-proprietorship, you are personally liable and aren't considered separate from your business.
Filing taxes as a sole-proprietor is pretty easy.
If starting a business was like a Choose Your Own Adventure book, then this is the easiest choice: choosing nothing. If you provide a service or product to someone by yourself and get paid without registering for any kind of business. You're considered a sole proprietorship.
It does have some drawbacks.
With a sole-proprietorship, you are personally liable and aren't considered separate from your business. That means your business money isn't separate from your personal assets, like your: money, car or house. Plus, your personal assets could be taken in a lawsuit. Yikes.
Raising investment money can be tough because you can't sell stock or shares of ownership in the company. Banks might hesitate to lend money because they perceive a bigger risk in lending to just one person.
The upside.
Filing taxes as a sole-proprietor is pretty easy. You have what's called “pass through status” where profits are passed straight to business owners and are just part of personal taxes instead of also being included in the business taxes. Basically, since the business money isn't separate from your personal money, you just submit once with a few extra forms.
Just remember, as a sole-proprietor, you have factor in self employment taxes, which are explained on irs.gov. The cool thing about a sole proprietorship is that your business expenses can be tax write-offs like a new computer for work, or a new desk. You’ll want to check with an accountant but tax write-offs are a real advantage of owning your own business.