- A Sole Proprietorship is a Legal Entity. If you learn anything in this blog post, remember this: a sole proprietorship is not a legal entity. It refers to a person who owns a business and is personally responsible for its debts.
- Sole Proprietors Have to Incorporate. You do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities. You still may need certain licenses and permits depending on the type of business.
- Sole Proprietors Don’t Have to Pay Taxes. Because you and your business are one and the same, sole proprietors pay personal income tax on profits earned from the business. Taxpayers are generally required to pay at least 90% of their taxes through the year or make estimated tax payments. In addition, sole proprietors are responsible for paying self-employment taxes, which is a Social Security and Medicare tax.
- A DBA Protects Sole Proprietors From Personal Liability. Whether you use your own name or create a fictious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"), there is no legal separation between you and your business. Sole proprietors can be held personally liable for the debts and obligations of the business and for their employees’ actions.
- Banks and Clients Don’t Care. Think about how you decide to work with a business. You want to make sure it’s legit before you sign a contact, right? That’s why banks typically require that businesses incorporate before they’ll lend them money. Failing to incorporate your business may also impact whether customers or clients want to work with you. Sole proprietorships can seem unprofessional or flaky.
A sole proprietorship may be the easiest type of business to establish, but it’s also the easiest business to fail. It offers no protection from personal liability, so you can be sued and held personally responsible for the business’ debts. Moreover, it’s very difficult to get loans and grants. If you have a freelance business – whether it’s your side hustle or main hustle – you should incorporate today. Most freelance businesses benefit from a Limited Liability Company (LLC) structure. Are you ready to form your business? Start now: SoleVenture has your back.