Sole Proprietorship

A sole proprietorship is most commonly defined as a business owned and operated by a single person. Creating a sole proprietorship is quite simple. You will need to obtain the required licenses for this type of business and begin operation. The business may use a fictitious name, but the business does not have a separate legal existence apart from its owner under state law. Fictitious names must be registered with the Alabama Secretary of State if the sole proprietor is a for-profit business. Many small businesses operate as a sole proprietorship.

There is no need to file a separate income tax return for the proprietorship because the activity is reported on the owner’s federal and state individual income tax returns. Since a self-employed person is not an employee, there is no provision to withhold payroll taxes to cover federal, state, local and Social Security tax obligations of the proprietor/owner. If you are a self-employed sole proprietor, you must make quarterly estimated payments to provide for these tax liabilities. Here are some of the advantages and disadvantages.

Advantages

• Ease of Formation
• Sole Ownership of Profits
• One Person has all of the decision making power
• Profits are not directly taxed (since there is no separate legal entity)
• Ease of discontinuing the business

In most cases, you are not required to obtain an Employer Identification Number (EIN) from the IRS unless you have employees

Disadvantages

• There is unlimited personal liability. This means if you end up owing a lot of money to creditors they can come and take things like: your car and house if needed
• Limited ability to raise capital for operating and building your business
• The business is terminated upon the death of the owner
• Profit is subject to self-employment tax