What is a sole proprietorship?

What is a sole proprietorship?A sole proprietorship is the business or anindividual who has decided not to carry hisbusiness as a separate legal entity, such as acorporation, partnership or limited liabilitycompany. This kind of business is not a separateentity. Any time a person regularly providesservices for a fee, sells things at a flea marketor engage in any business activity whose primarypurpose is to make a profit, that person is a sole

proprietor. If they carry on business activity tomake profit or income, the IRS requires that youfile a separate Schedule C \"Profit or Loss Froma Business\" with your annual individual incometax return. Schedule C summarizes your income andexpenses from your sole proprietorship business.As the sold proprietor of a business, you haveunlimited liability, meaning that if yourbusiness can't pay all it liabilities, thecreditors to whom your business owes money cancome after your personal assets. Many part-timeentrepreneurs may not know this, but it's anenormous financial risk. If they are sued or can'tpay their bills, they are personally liable forthe business's liabilities.A sole proprietorship has no other owners toprepare financial statements for, but theproprietor should still prepare these statementsto know how his business is doing. Banks usuallyrequire financial statements from sole

proprietors who apply for loans. A partnershipneeds to maintain a separate capital or ownershipaccount for each partners. The total profit of thefirm is allocated into these capital accounts, asspelled out in the partnership agreement.Although sole proprietors don't have separateinvested capital from retained earnings likecorporations do, they still need to keep these twoseparate accounts for owners' equity - not onlyto track the business, but for the benefit of anyfuture buyers of the business.