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December 21, 2017

What Is A Sole Proprietor Entity Type?

As you set out to start a new company, you must choose the right entity type. Your business structure determines how you pay taxes, your personal liability, and what paperwork you should file. If you’re thinking about operating as a sole proprietorship, here are some things you should know about this entity type.

Definition of a Sole Proprietorship

A sole proprietorship is a simple form of business because it’s technically not a legal entity–it’s simply a person who operates a business as him- or herself. The owner can run the business under his or her own name or under a fictitious trade name.

Why Starting a Sole Proprietorship Is a Popular Choice

There are several benefits of a sole proprietorship, including:

  • Simple to set up
  • Low cost
  • Easily handle taxes on your personal tax return

All you have to do to get started as a sole proprietor is register your name and secure necessary local licenses. When it’s time to pay taxes, you’ll need to file Form 1040 and a document called Schedule SE. The simplicity of this business type makes it attractive, especially if you’re just starting out.

Personal Liability As a Sole Proprietor

Another thing you should know about running a sole proprietorship is that you would be personally liable for any business debts. If your business is low-risk, this shouldn’t be an issue. However, if your business experiences success, you may want to consider forming a different type of business.

When an EIN Is Necessary for Sole Proprietors

You can file taxes for a sole proprietorship using your own Social Security number, but you’ll need a federal tax ID number to accomplish any of the following:

  • Hire employees
  • Have a solo 401(k) plan
  • File for bankruptcy

Certain banks may require you to get an EIN before you open a business bank account with them. If you need to apply for an EIN, you can easily file Form SS-4 online.

If you have any more questions about getting a tax ID number for your sole proprietorship, contact IRS-EIN-Tax-ID Filing Service.

Filed Under: Business

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