People who are just getting started in business might wonder what type of legal entity they need to establish. This is a complex question that takes many factors into account. For some individuals, such as freelancers and contractors, a sole proprietorship might be a viable option.
This is only appropriate for people who are the only owner of a company. They are solely responsible for the company and the debts. There isn’t any additional paperwork to file and no added fees, which do come with business entities like a limited liability company.
The sole proprietor is personally responsible for the debts and liabilities that the company incurs. These aren’t separated from the owner’s personal liabilities and debts. Some business owners use this option due to the simplicity of the setup.
The downside to this is that if there is a lawsuit or a claim against the business, the owner’s personal property can be claimed. Sometimes, sole proprietorships have special insurance policies to add a layer of protection.
The income taxes are another area that remains fairly simple. The owner of the company counts the company’s income as their own personal income for taxes. This is done on a personal income tax form, typically the 1040 along with specific schedules that go along with it.
The legal liabilities of a sole proprietorship can be vast. If you are a business owner with this type of company, make sure that you take steps to vigorously protect your personal assets, as well as your business. Your livelihood and personal assets depend on this.
