Sole proprietorships are formed by an individual deploying their own assets and liabilities in the pursuit of a business venture. There are generally no organizational documents, or other formalities required to form a sole proprietorship.
Assets are generally owned by the individual and deployed in the business venture. For example, a person starting a web site design business may use an office in their home or apartment and computer equipment the individual already owns.
Liabilities, such as for office supplies and the like, are generally owed by the individual business owner. In the event the sole proprietorship shall fail, the individual owner is typically responsible for the unpaid debts of the business.
Typically sole proprietorships are operated under a business name. In such cases, the individual owner should protect the use of the business name by making a fictitious name filing with the Florida Secretary of State.
Generally, there should not be any taxable events on the creation of a new sole proprietorship. The profits and losses from the operations of a sole proprietorship are reported on Schedule C to IRS Form 1040 for federal income tax purposes. The sole proprietor should keep separate books and records for the sole proprietorship's financial activities. The State of Florida does not impose an income tax on the profits or losses of a sole proprietorship. The owner of a sole proprietorship can use his or her Social Security Number for the business and its related bank accounts. A sole proprietorship may also obtain an Employer Identification Number for use with the business' bank accounts and employment tax returns. The collection and remittance of sales and use taxes, as well as ad valorem (property) taxes, are generally the same for any type of business entity.
Sole proprietorships may have real estate associated with their business operations. As with other assets, the individual owner of the sole proprietorship typically owns any real estate used incident to the business operations of the sole proprietorship. If the property is owned by another business entity or third party, the sole proprietorship typically pays rent to the owner for its use of the real property.
Sale or Exchange
Since sole proprietorships are not considered entities separate from their individual owners, any sale or exchange of the business typically takes the form of a sale or exchange of the assets and liabilities of the business.
Businesses operated as a sole proprietorship need to actively manage their business risks. The assets and liabilities of the business belong to the individual owner. So it is essential that the owner obtain appropriate insurance coverage (hazard, liability, workers' compensation, and the like). Any unexpected claims that are not covered by insurance will be the responsibility of the individual business owner. This is one of the major problems of using a sole proprietorship as the vehicle to operate a business.
In the event of the sole proprietorship's owner's death, the assets and liabilities of the business generally become part of the deceased owner's probate estate, and are distributed in accordance with the terms of the owner's last will and testament. Depending on the nature and extent of the business' assets and liabilities, it may be impossible for the heirs of the business to continue the business after the owner's death. Once the business is up and running, it is very important for the owner to come up with a business succession plan that includes consideration of the death, disability and/or retirement of the business owner.
Termination and Winding Up
As with the formation, there is generally no formal method for terminating and winding up a sole proprietorship. When the owner decides to discontinue the business, they simply do whatever they wish with the remaining assets, and pay any remaining liabilities. The owner should consider the income tax consequences to the termination and winding up before he or she decides to actually end the business operations.