Sole Proprietorship: What You Should Know

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What is a sole proprietorship?

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A business with just one owner who pays personal income tax on profits earned

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Which of the following is NOT a characteristic of a sole proprietorship? Unlimited liability for the owner, Requires registration with the state, Pass-through tax advantage, Quick and easy setup

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Pass-through tax advantage

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What is one reason why sole proprietors often do business under their own names? Options: It is legally required, It is easier to obtain financing, It eliminates the need for a separate business name, It provides liability protection

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It eliminates the need for a separate business name

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How are profits and liabilities treated in a sole proprietorship?

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Profits and liabilities both flow directly to the owner.

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Which form must sole proprietors fill out to pay taxes?

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Form 1040 and Schedule C

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What is one advantage of a sole proprietorship in terms of paperwork?

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Requires less paperwork compared to other business structures

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Why might obtaining capital funding be difficult for sole proprietors?

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Sole proprietors typically have a limited track record and banks are hesitant to loan funds.

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What is one reason why sole proprietors might transition to a different legal structure as their business grows? Options: To decrease their tax liability, To increase government regulation, To limit their personal liability, To simplify paperwork

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To limit their personal liability

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Which statement about sole proprietors is true? Options: They require a separate business checking account, They can use their own Social Security number for taxes, They are required to obtain an employer identification number (EIN), They have limited liability protection

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They can use their own Social Security number for taxes

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What is a necessary step in converting a sole proprietorship to an LLC?

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Filing articles of organization with the state