What is a Sole Proprietorship?

Sole proprietorships are businesses owned by a single person. The owner assumes all legal and financial responsibility for the company.

Most sole proprietors will file an LLC with their state, to shield their personal assets from business risks to the extent that they can, as well as to be recognized by the state as a business for other purposes.

LLC stands for limited liability company, and it serves as a pass-through entity for the owner.

As a pass-through, there is no significant separation from the assets of the business and those of the owner, especially for tax purposes, so the owner cannot be an employee who leaves retained earnings on the books.

The owner must report all revenue as income. The limited liability primarily protects the extent to which the individual can be held liable in certain circumstances, as defined in state law and the IRS Code.

A sole proprietor who does not use an LLC is wholly liable for all debts and legal matters pertaining to his business, including all of his personal assets.