What Is a Sole Proprietorship?

The sole proprietorship is a business or person who has decided not to operate their business as a separate legal entity, such as a corporation, partnership or limited liability company. This type of business is not a separate entity. When a person provides services for a regular fee, sells things in a flea market, or engages in any business that is aimed at making a profit, that person is a sole proprietorship. If they are doing business to earn a profit or income, the IRS will need to file a separate “Profit or Loss from a Business” document along with your annual individual income tax return. Schedule C summarizes your income and expenses from your sole proprietorship.

As the owner of a business, you have unlimited liability, which means that if your business cannot pay all its liabilities, creditors who owe your business can come after your personal assets. Most part-time entrepreneurs are unaware of this, but it is a huge financial risk. If they are sued or cannot pay the bills, they are personally liable for the liability of the business.

There are no other owners who prepare financial statements for a sole proprietorship, but the owner should still make these statements to learn how to do business. Generally financial statements are required from individual owners who apply for loans. A partnership must maintain a separate capital or ownership account for each partner. The total profits of the company will be allocated to these capital accounts as set forth in the partnership agreement. While individual owners do not have separate investment capital from retained earnings like corporations, they still have to keep these two separate accounts for the owners’ shares – not just for monitoring the business, but for the benefit of prospective buyers of the business.