A sole proprietorship is a form of business organization. Many small business owners start their new business venture as a sole proprietorship. Sole proprietorships are simple business organization and do not usually require extensive amounts of paperwork to start. Accounting is also easier for sole proprietorship organizations. Business owners with little or no accounting background can usually maintain their company’s financial records using a few basic practices.
Facts
Sole proprietorships do not require business owners to set up a large business organization. Owners can obtain a business license, state sales tax permit and other industry permits required for their business. These documents will effectively begin official business operations for a sole proprietorship. Sole proprietorships hiring employees or using independent contractors will often need a federal identification number for tax purposes. Business owners may also need to obtain business or general liability insurance for their company.
Considerations
Accounting for sole proprietorships does not usually require individuals to maintain separate records for their business and personal assets. The reason is the business cannot exist in the absence of the owner. However, small business owners should seriously consider is separating business and personal records. This provides business owners with separate information relating to their company’s profit and losses. Business owners needing to earn a salary from their business can simply make owner withdrawals.
Features
Business owners often use a separate bank account and accounting ledger when operating their sole proprietorship. The type or style of accounting system does not usually matter when relating to sole proprietorships. Business owners have wide flexibility to create a general ledger that works best for their sole proprietorship organization. The general ledger can include several sub-ledgers and journals. Small business owners may only need a cash receipts and disbursements journal to keep track of money coming in and going out of the business.
Function
The Internal Revenue Service requires sole proprietorship income to be reported on the business owner’s individual income tax form. Business owners usually fill out a separate form outlining the company’s income, expenses and assets to calculate the amount of income earned during the calendar year. This process is known as flow-through taxation. Sole proprietorships offer business owners a significant advantage because personal income tax rates are usually much lower than business tax rates.
Expert Insight
NEVE can help business owners set up their sole proprietorship accounting system. We have a wide range of expertise and knowledge in business accounting. Business owners can maintain basic accounting records during business operations and turn this information over to NEVE quarterly for tax planning and preparation. Using NEVE for tax planning and preparation will help business owners limit their tax liability.
