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The Basics of Business Structures – The Sole Proprietorship

December 15, 2020

Business Structures – Sole Proprietorship

One of the first steps that an entrepreneur must complete in order to start a business, is to decide which business structure they should choose. There are four primary business structures: Sole Proprietorship, Partnership, Corporation, or Limited Liability Company. This article will provide a brief introduction to the sole proprietorship. Future articles will introduce the other business structures. Overview: The term “sole proprietorship” is used to describe a business that is owned and operated by one person who is referred to as the sole owner or sole proprietor. For legal and tax purposes, the business does not have its own identity. The sole owner and the business are considered one in the same. Sole proprietorships are popular because they are the easiest and most inexpensive business structure to set up. Formation: In Iowa, sole proprietorships are not required to file organizational documents with the Iowa Secretary of State. To create a sole proprietorship, the sole owner must decide whether to operate using their personal name or to assume a business name. If a business name will be assumed, the owner must file a trade name filing with the county recorder in the county where the business is located. If the business will operate using the owner’s personal name, no county filing is required. Tax Responsibilities & EIN: Sole proprietorships do not need to file business tax returns, instead business profits or losses need to be reported on the sole owner’s personal tax return. Similarly, sole proprietors do not need to acquire an Employer Identification Number (“EIN”) unless they will hire employees. All businesses with employees are required to report wages to the IRS using their EIN. A sole proprietor without employees can use their own social security number for most things that an EIN would be used for. Some sole proprietors without employees prefer to acquire an EIN in lieu of using their own personal social security number. Unlimited Liability: Sole proprietorships do not have the protection of limited liability. Instead, the sole owner has unlimited liability. This means that the sole owner is personally liable for the debts and expenses of the business. If the business is sued, the sole owner risks losing their personal assets. To help protect their assets, a sole proprietor should consider obtaining a business liability insurance policy. Additional Considerations:Depending on the specific business activities, a sole proprietor may be required to report and pay certain taxes which are not discussed above, such as sales tax and use tax. The sole proprietor may also need to obtain licenses or permits. Please contact any of our business formation and startup attorneys if you would like additional guidance regarding this topic or assistance forming a business entity.

Attorney Author

Sarah C. Barr

Sarah C. Thielen is an Associate Attorney whose practice focuses on estate planning, tax law, and business law, with particular attention on start-up and formations.

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