What is a sole proprietorship and how do I create one?

A sole proprietorship is a company with one owner that is not registered with the state as a limited liability company (LLC) or a corporation. In some states, a sole proprietorship is referred to as a DBA (doing business as), as in "José Smith, doing business as Smith Heating and Air Conditioning."

Establishing a sole proprietorship is cheap and relatively uncomplicated. You don't have to file any papers to set it up -- you create a sole proprietorship just by going into business. In other words, if you'll be the only owner of the business you're starting, your business will automatically be a sole proprietorship, unless you incorporate it or organize it as an LLC. Of course, you do have to get the same business licenses and permits as any other company that goes into the same business.

How are sole proprietorships taxed?

Unlike a corporation, a sole proprietorship is not considered separate from its owner for tax purposes. This means the sole proprietorship itself does not pay income tax; instead, the owner reports business income or losses on his or her individual income tax return. Note that all business income is taxed to the owner in the year the business receives it, whether or not the owner removes the money from the business.

Are sole proprietors personally liable for business debts?

Legally, a sole proprietorship is inseparable from its owner -- the business and the owner are one and the same. As a result, the owner of a sole proprietorship is personally liable for the entire amount of any business-related obligations, such as debts or court judgments. This means that if you form a sole proprietorship, creditors of the business can come after your personal assets -- your house or your car, for example -- to collect what the business owes them.

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