An individual who owns and operates their own business is a sole proprietor. The easiest and most common business to set up is the sole proprietorship. This is the simplest form of business organization and is the default classification when one person owns a business, as described in IRS Publication 583, Starting a Business and Keeping Records.
Sole proprietors can conduct business under their own name or create a separate business or trade name. The proprietor must register any trade names with the appropriate state and local agencies. Depending upon the type of business, there may be licenses, permits, or other documents required to operate as a sole proprietor. The Small Business Administration (SBA) offers information at the federal level as well as specific states.
As a sole proprietor, the individual can guide the business in any direction they choose, make decisions, hire and fire employees, establish office policies, and receive all the profits. However, the sole proprietor is also ultimately responsible for any debt or loss that the business incurs. Because there is no legal separation between the person and the business, all business and personal assets are at risk in the event of legal action or bankruptcy. Despite how easy it is to become a sole proprietor, entrepreneurs should carefully consider this unlimited liability when determining the structure for their business.
Sole proprietors will usually file a Schedule C: Profit or Loss From Business to report income and expenses at tax time. The business owner will incorporate this information on the personal federal Form 1040 US Individual Income Tax Return before they file their taxes. Sole proprietors must pay Self-Employment Tax on their profits and may need to pay estimated taxes quarterly as well.