Sole Proprietorship: What You Should Know

What is a sole proprietorship?

• A business owned by multiple individuals

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

• A corporation with limited liability

• A partnership with unlimited liability

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

What is one reason why sole proprietors often do business under their own names?

• It is legally required

• It is easier to obtain financing

• It eliminates the need for a separate business name

• It provides liability protection

How are profits and liabilities treated in a sole proprietorship?

• Profits are separate from the owner's income, but liabilities extend to the owner

• Profits and liabilities are separate from the owner

• Profits and liabilities both flow directly to the owner

• Profits are taxed separately from the owner's income, but liabilities are limited to the business

Which form must sole proprietors fill out to pay taxes?

• Form 1065

• Form 1099

• Form 1040 and Schedule C

• Form W-2

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

• Requires extensive registration with the state

• Requires obtaining an employer identification number (EIN)

• Requires renewal fees for registration

• Requires less paperwork compared to other business structures

Why might obtaining capital funding be difficult for sole proprietors?

• Banks prefer working with sole proprietors due to their low risk

• Sole proprietors have access to a wide range of investors

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

• Sole proprietors are exempt from liabilities

What is one reason why sole proprietors might transition to a different legal structure as their business grows?

• To decrease their tax liability

• To increase government regulation

• To limit their personal liability

• To simplify paperwork

Which statement about sole proprietors is true?

• 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

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

• Filing articles of organization with the state

• Obtaining a Social Security number

• Creating an LLC operating agreement

• Registering with the state secretary