A sole proprietorship is the simplest form of business entity.

Actually, a sole proprietorship is not a separate entity at all – the term simply refers to ownership of a business by one person. Any person who begins a business without one or more co-owners and without deliberately creating an entity such as a corporation or limited liability company is a sole proprietor by default.

Because there is no separate entity, a sole proprietorship does not file a separate income tax return. Rather, the net income (or loss) of the business is reported on the sole proprietor’s personal federal and state income tax returns.

However, a sole proprietor is required to obtain a federal employer identification number if the business has employees or deals in alcohol or firearms. Depending on circumstances, various state tax registrations also may be necessary. See the Business Checklist for details.

The main advantage of a sole proprietorship is simplicity. Primary disadvantages include unlimited personal liability of the owner for business obligations and difficulty raising capital.

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