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FAQs Relating to Sole Proprietorship

1. How are sole proprietorships taxed?

A sole proprietorship is not considered separate from its owner for tax purposes. This means the sole proprietorship itself does not pay income tax; instead, the owner reports business income or losses on his or her individual income tax return. Note that all business income is taxed to the owner in the year the business receives it, whether or not the owner removes the money from the business.

2. Are sole proprietors personally liable for business debts?

Legally, a sole proprietorship is inseparable from its owner -- the business and the owner are one and the same. As a result, the owner of a sole proprietorship is personally liable for the entire amount of any business-related obligations, such as debts or court judgments. This means that if you form a sole proprietorship, creditors of the business can come after your personal assets -- your house or your car, for example -- to collect what the business owes them.

3. Do I need a consultant to start a sole proprietorship or partnership?

There are no legal requirements for establishing a sole proprietorship or a partnership, other than to register the business name. It is always recommended to consult with a good consultant to ensure that you are structuring your business appropriately for your current and future business needs and that you are aware of all your legal obligations.

4. What are the disadvantages of a sole proprietorship?

As the owner of a sole proprietorship, you have unlimited liability. This means that you will be held personally responsible for any debts, liabilities or obligations that your business may incur