How-To

The Lone Ranger: Sole Proprietorships

Of all the business structures, the sole proprietorship is the simplest. The IRS classifies this as any businesses started by an individual. It is typical for new businesses with only one owner to start as sole proprietorships. And some times, they stay that way. On the other hand, others may feel that they need to start adding partners to expand the business; sometimes incorporating can be a wise decision, sometimes not.

Most people don’t know this, but it isn’t always necessary to do all of the official work to start a business (file government paperwork, register with the IRS, etc.). In fact, the IRS considers you a sole proprietor if you don’t incorporate (follow the process that makes the business a separate legal entity). But that probably is the biggest risk of a sole proprietorship, that you are not a separate legal entity. Any debts or claims against the business are filed against what personal property the sole proprietor has, and if sued, insurance may be the only thing that keeps the sole proprietor from losing everything he/she owns.

Taxes Are Personal

Since sole proprietorships aren’t taxable entities, they don’t need to fill out any separate forms for tax reasons. Instead, they add just a few forms to their personal tax forms; this is the only form of financial reporting needed. But make sure which forms you need to fill out to include with your personal forms; specialized businesses usually have to fill out special forms. Go to the IRS website for more tax information regarding sole proprietorships.

Reporting

Unless a sole proprietor seeks funding from outside sources (bank loan, SBA loan), there is actually no financial reporting requirements for sole proprietors. However, if seeking outside funding, the institution in which lends the funds will provide the information needed for reporting purposes. When applying for a business loan, sole proprietors fill out a form showing their liabilities and assets. In some cases, it is necessary to submit a business plan if the loan amount is quite sizable. Although financial reports aren’t necessary for sole proprietors who aren’t seeking outside funding, it would be a good idea to keep tabs on how well the business is doing. You can do this by completing profit and loss statements periodically.

This can help eliminate huge mistakes, or at least fish them out before they become huge mistakes. The whole idea “looking good on paper” is something not to go by. Don’t falsify your business information just because you want to look better on paper. Since you don’t have to report as a sole proprietor, the only person you will be fooling is yourself. It isn’t a good idea; even if it is bad, don’t lie about what’s going on in your business financial wise, or in any other aspect.