Business Organization - Sole Proprietorship

A common form of business ownership is the sole proprietorship. Because it is the least complicated form of business ownership and is the easiest to set up and to terminate, it is understandable why the majority of businesses nationwide (85 percent) are of this type. 

A business with a sole proprietorship is owned and controlled by one person; the owner is the business. The funds for the business come from the owner's personal funds such as savings and/or investments, loans from lending agencies, and sometimes loans or gifts of monies from friends or family members.

All the owner's personal assets can be used to satisfy debts and taxes owed by the sole proprietorship. Personal assets also may be tapped to pay any legal damages resulting from lawsuits filed against the business, subject to certain statutory exemptions. This means all the owner's assets--land, home, vehicles, checking and savings accounts, and investments--is subject to claims by creditors for satisfaction of business loans, contracts and legal judgments. For these reasons, liability insurance for business activities is an important risk management tool for the sole proprietor, just as it is for other business owners. 

A sole proprietorship files a federal income tax form, either IRS Schedule C, C-EZ or Schedule F to report income or losses from the business as part of the owner's personal federal income tax return. The sole proprietor pays social security taxes on his or her "before tax" net income, and is allowed an income tax deduction equal to one half of the self-employment taxes paid.

Retirement plans available to sole proprietorships include Keoghs, simplified employee plans (SEP) and savings incentive match plans for employees (SIMPLE). 

A sole proprietorship has serious limitations from the perspective of estate planning and inter-generational transfers. First, business continuity is linked to the life of the proprietor. When the proprietor dies, so does the business. Second, the proprietor's wealth consists of business assets-- equipment and land that are titled in the proprietor's name only. 

Most proprietorships do not transfer either the title to or the control of business assets until retirement or death. Families with a goal to continue the business into the next generation often consider other business forms such as a partnership, a corporation or limited liability company.