Page 704 - Encyclopedia of Business and Finance

eobf_S 7/5/06 3:21 PM Page 681

Sole Proprietorship

TERMINATION OF THE BUSINESS Agriculture, forestry, hunting, and fishing
A sole proprietorship legally terminates immediately upon Arts, entertainment, and recreation
the death of the owner. Even if a spouse, relative, or friend
Construction
of the deceased owner assumes ownership and keeps the
business operating under the same name, legally a new Educational services
business enterprise has been formed. It is recommended Health care and social assistance
that owners at least make a will, and preferably a revoca- Information
ble trust, to name the beneficiary of the owner’s interest in
the business. Manufacturing
A sole proprietorship also terminates if the ownership Mining
interest is sold to another person or group of persons, if Professional, scientific, and technical services
the business is abandoned by the owner, or if the owner
becomes personally bankrupt. Real estate and rental and leasing
These potential risks of sudden termination place sole Religious, grant making, civic, professional, and
proprietorships at a serious disadvantage in attracting top- similar organizations
flight employees who may not to wish to tie their future Retail trade
to a business that may suddenly become inoperative.
Transportation and warehousing
Utilities
INCOME TAXES
When filing an income tax return, no legal distinction Wholesale trade
exists between a person as a sole proprietor and an indi-
vidual person. The sole proprietor’s personal income tax REQUISITES FOR SUCCESS
return (Form 1040) must include calculation of the pro- Success does not come easily for small business enter-
prietorship’s income tax as well as any income or loss that prises. To achieve success, authorities have recommended
the owner incurs from any additional entity, such as an a number of characteristics and activities.
employee, investor, or the like. Successful sole proprietors should be strong physi-
If, for example, a taxpayer realizes net earnings of cally and emotionally. It is very important that they be in
$65,000 from a sole proprietorship and $28,000 from good health. Attitudes of business owners are critical.
investments, the IRS considers the total net income to be They should possess a positive outlook and enthusiasm.
$93,000. However, if a sole proprietor suffers a net loss of They should be receptive to advice. They need to work
$42,000 from the business and a $71,000 net income very hard, particularly during the first several years.
from investments, the IRS would consider the total Sole proprietors should possess considerable business
income to be $29,000. experience, especially in the product or service lines offered
Sole proprietors use Schedule C of IRS Form 1040 to by their business. Having an appropriate and sufficient
file their income tax return for the proprietorship section education is very valuable. Other capabilities could be
of their income. The details of Schedule C can get very added, such as getting along with different kinds of people,
involved, so many sole proprietors require professional having the ability to plan and organize, knowing how to
advice for this phase of their income tax report. arrive at and carry out decisions, and being a self-starter.
Where applicable, sole proprietors file Form 4562 to It is often recommended that sole proprietors select a
report depreciation and amortization, and Form 8829 to type of business in which they have both skills and interest.
report business use of the owner’s residence. The geographic location should be investigated thoroughly
regarding its growth potential. And it may be important for
a sole proprietor to consider having a partner.
TYPES OF BUSINESS
In setting up a business, a new sole proprietor should:
Proprietorships engage in a wide variety of businesses.
Using the major categories of the new North American
• Learn as much as possible about the product or
Industry Classification System (NAICS), the types of
service being offered for sale
business activity that small businesses (including sole pro-
• Make sure there is enough capital available to meet
prietorships) are likely to be involved in are:
necessary equipment and building needs as well as
Accommodation, food services, and drinking places to pay for the first year’s operating expenses
Administrative and support and waste management • Determine the amount to be invested and find the
remediation services sources of any necessary loans

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 681