Sole Proprietorships

A sole proprietorship is formed when one person starts a business in his or her name (or in a fictitious name). Although multiple people might work for a sole proprietorship, only one person will own the business.

The owner of a sole proprietorship will often open a separate bank account to track information about the revenues and expenses of the business, but there is no separate tax return prepared for the business. Business income is reported on the owner’s personal tax return, and the owner’s Social Security number is used as the business's tax identification number. The low cost of launching a sole proprietorship makes it a popular option for start-up businesses; you can go out and cultivate business for yourself.

Sole proprietorships do not provide liability protection. Should there be an accident, a problem with the product you are selling, or a lawsuit filed against you by a customer, your personal assets would be at risk. Liability protection limits the amount that a person or entity with a claim against you can collect from you personally. This amount is typically based upon whether or not you have purchased enough business insurance to cover the claim.