Operating Alone as a Sole Proprietor

If you’re interested in simplicity, look no further. A sole proprietorship is

recognized as the quickest, easiest, and least expensive method of forming

a business. The main caveat is that only one person can operate as a sole

proprietor. You and the business are literally the same entity. The upside

of that arrangement is the ease of getting up and running. With the mere act

of conducting business (and obtaining a license), you’re considered a sole

proprietor.

The downside of being a sole proprietor is that potential legal ramifications

exist. Because you and the company are one, you’re fully accountable for the

losses of the business along with any legal matters. Whether the business is

involved with lawsuits or problems with creditors, you’re personally liable. No

corporate protection is available — your personal assets (such as your home)

can be sold and your personal bank accounts used to pay off creditors.

As a sole proprietor, you’re also responsible for all taxes. The profits and

losses of the business are listed on Schedule C on your personal tax return.

And, you pay self-employment taxes (Schedule SE), which is a combined

Social Security and Medicare tax. It’s calculated as a percentage of your

earnings, and as of the 2009 tax year, the percentage is 15.3 percent (12.4

percent for Social Security and 2.9 percent for Medicare).