Example of a Sole Proprietorship Business
Businesses can organized as forms such as sole proprietorships, partnerships or corporations. The sole proprietor owns the business by himself and does not have partners or shareholders. In the sole proprietor model, the owner and the business are the same entity. Whether an individual carries out work as a sole proprietor within the business or in his own name, for example by taking a job unrelated to the business, all the activities are the responsibility of the individual concerned. Legally, there is no distinction between the individual and the business.
You become a sole proprietorship merely by starting a business. If Lester starts a small manufacturing operation making fold-up boxes, he is the sole proprietor. Depending on where he lives, Lester may have to register and obtain licenses for his business. He can hire employees, but they work directly for him. He may operate the business under his own name or register and use a trade name.
If one of Lester's employees causes an automobile accident while working, the victim can sue Lester as the owner of the business. If customers or suppliers injure themselves while on the business premises, Lester is liable. This means that injured parties can sue Lester personally and make claims against his personal property, including his house and car.
Since Lester and the business are legally the same, the business income is Lester's income as well. If Lester has additional income from activities other than the business, he has to add all the income together for tax purposes. Lester also has to keep track of all his business expenses. He has to report all his income and expenses on the individual tax return IRS Form 1040, with Schedule C attached.
Although Lester and his business are a single entity, operating his business from its own bank account helps him track business performance. When Lester deposits his business earnings into a business bank account and pays business expenses from it, he can see at a glance whether the business is profitable. A business bank account allows him to issue checks in the name of the business, which gives his business a professional look.
If Lester wants to buy machinery for his manufacturing business or buy supplies for a large order, he may need to borrow money. Banks will lend a sole proprietorship money based on the creditworthiness of both the business and the owner, but the owner has to sign the papers and is responsible for re-payment. Even if the business fails, the owner still has to pay back the loans to the bank.