This is a guest post by Shannon Nash, Esq., CPA at Register Lett, LLP (snash@registerlett.com) and an excerpt from her Small Business Guide.

The sole proprietorship is the easiest type of businesses for one person to start.  Many people and start-up businesses who call themselves “consultants” really have sole proprietorships.   In fact, once you begin to provide services or products to the public, or secure clients or customers, you’re in business as a sole proprietorship. That’s all that is needed. There are no major forms or paperwork to file (aside from a business license and similar forms that are primarily required by state and local laws and regulations).

There are some potential downsides of a sole proprietorship? One downside is unlimited liability. It’s important to remember that your entity choice can expose your personal assets to any business legal matter. As a sole proprietor, if you have liabilities from your business, these creditors may also come after your personal assets (i.e., your house, your car, etc.) to satisfy their claims.

With a sole proprietorship, you still have total responsibility for all aspects of the business; from selling products to paying taxes. The sole proprietorship pays taxes on the sole proprietor’s tax return – Schedule C, Profit or Loss from Business (Form 1040); then includes it on line 12 of Form 1040. This means that the profits of the business are only taxed once, not twice, as may be the case with a C Corporation. Also, sole proprietors may be able to take advantage of special tax incentives; like deducting health insurance premiums or retirement plan contributions. If you plan to operate your sole proprietorship in more than one state, you may have to pay income or business taxes in each of those states (often called franchise taxes).