Sole Proprietorship & Rent
A sole proprietorship is a business structure that is intimately linked financially and legally with its owner operator. When a sole proprietorship earns money, these sums are taxed as personal income, and when a sole proprietorship loses money, these sums come out of the owner's personal bottom line. For a sole proprietor, rent is one item on a list of business operating expenses. Rent involves a special type of personal financial commitment because of the necessity of signing and adhering to the terms of a lease.
A sole proprietor who agrees to rent a business location, such as a retail storefront, makes a legally binding financial commitment to pay the sums that the business accrues in rent during the entire period of the lease. Even if the business moves on to a different business location or stops doing business altogether, the sole proprietor usually is obligated to pay the rent on the space for the full term of the lease. In some cases, the business owner might be able to assign or sublet the space, depending on the terms of the lease.
A sole proprietor who signs a commercial lease agrees to maintain the property and take responsibility for any liabilities or damages during the duration of the lease period. Even if the business stops operating in the space and the lease is assigned to another business, the sole proprietor normally is still obligated to pay for any damages, and even must pay the rent if the assignee is unable to pay. Lease assignments usually require the written consent of the landlord, and they often involve paying an assignment fee that can run into the hundreds of dollars.
When a sole proprietorship operates out of the owner's home, the sole proprietor is entitled to take a home-office business deduction for income tax purposes, as long as the space used for the business is exclusively designated for business use. Taking the deduction requires measuring the entire square footage of the home, as well as the square footage devoted to business activities, and writing off the corresponding percentage of the rent or mortgage.
Rent payments made on a commercial business location also reduce a sole proprietor's tax liability. Sole proprietors pay income tax on business net income, which is the amount left over after subtracting operating expense from incoming revenue. Business rent is one of the operating expenses that is subtracted from gross income when calculating taxable net earnings.