Sole Proprietorships

Clearly the most recognized business enterprise is the simple form of the sole proprietorship. While the sole proprietor is entitled to keep all profits generated by the business activities, sole proprietor is very much personally liable for all contracts, even if these contracts are entered into ID sole proprietors employees.  This can be a problem if your business involves certain types of risk.


If a sole proprietorship, i.e. the company, incurs debts the general rule is that these obligations of the business are directly attributed to the sole proprietor. This is true for any wrongs committed by employees of a sole proprietor so long as they were performed within the scope of employment. In the end the sole proprietor profits at the risk of his own personal proprietorship.


By default a single owner is organized as a sole proprietorship according to the Secretary of State California. The sole proprietorship’s organization is totally informal and not subject to a great deal of regulation, other than regular taxes. Most people who are self-employed start out being a sole proprietor, owning all of the assets in their company, and having absolute control over all of the management of the company, and retaining all the profits. The sole proprietor hires employees, signed leases with landlords, and takes out loans from banks. Especially in the city of San Diego, there are many permits including stoning and licensing regulations but in addition to that there are state and federal laws that this’ll proprietor must be cognizant of and comply with. A sole proprietor may sell his interest in the company, and at that point of the sole proprietorship would technically terminate. As for business succession, a death of a sole proprietor by default terminates the business form.

Advantages and Disadvantages of Sole Proprietorships

A sole proprietor is very simple and the profits and losses of the company are reported to the IRS on form 1030, the regular individual tax return. This is a great advantage. The company itself does not have a reporting requirement to the IRS. However if you hired employees, there may be additional associated taxes. Typically losses can be carried over four years. If you are operating to start a company but you’re losses continue, you may characterize your activities as a hobby to offset taxes. This is also a great advantage. The main disadvantage of LLC is that the sole proprietor is personally liable for the activities of the business. This means that the sole proprietor will be held personally liable for contract disputes, personal injuries, product liability, and any other debts or obligations or liabilities of the company. Another disadvantage is that other forms of business have particular tax benefits available to them associated with employee death benefit plans, dental plans, health plans, and group life insurance plans, which are not available to sole proprietorships.

What are the Sole Proprietor’s Taxes?

The sole proprietorship and the individual are treated as one for income tax purposes, both by the state and by the IRS. The owner typically deducts those reasonable and necessary expenses which are significantly attributable to the business operations. If the owner paid himself a salary it usually cannot be deducted. Is there any annual profits or losses the business is taxed at the capital gains rate. This is one reason why sole proprietors often form LLC’s in California and then elect with the IRS to be an S-Corporation. Call us today to speak more about sole proprietorships in San Diego.

Article and Video By Attorney Christopher Canton

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