A sole proprietorship is a business owned and operated by a single individual. There are few legal requirements to be met to establish a sole proprietorship. If an individual is operating the business under a name other than his/her own full first and last legal names, the business name must be registered as a trade name online with the Secretary of State at sos.state.co.us. This is the most common form of legal structure for new small businesses.
A sole proprietorship is the least complicated form of legal structure. All profits and losses of the business are reported directly on the owner’s personal income tax return. All decision making and control remains in the hands of the single owner. As a result, the owner is able to respond quickly to business challenges and opportunities.
The primary disadvantage of a sole proprietorship is that the proprietor is personally responsible for all the business liabilities and debts. If the business is unable to meet its financial obligations, creditors may pursue the personal assets of the owner. The sole proprietor is generally limited to financing the business by using his/her own assets and/or borrowing money.
Borrowing money will require periodic loan payments, regardless of whether the business is making money. Therefore, the fact that the owner’s personal assets are at risk is an important factor. If you and your spouse run your business together and share in the profits, your business may be considered a partnership. You should record your respective shares of partnership income or loss separately for self-employment taxes. Doing this may or may not increase your total tax. It will ensure that each spouse receives credit for social security earnings on which retirement benefits are based. IRS Publication #541, “Partnerships,” is a useful guide regarding partnership filing requirements and the allocation of income to the partners. Married couples are encouraged to consult a competent tax professional to determine the exact tax implications of their business. The Colorado Department of Revenue will require that a husband and wife register the trade name as a general partnership if both are listed as owners of the business.
NOTE: The transfer of a business between spouses is considered a change in ownership and is treated in the same manner as the transfer or sale of a business between two unrelated individuals.
For more information, visit mybiz.colorado.gov.