Business Structure 101: The Basics of Proprietorship

Filed in archive General on September 30, 2007

Why go into a home-based business? Why not indeed? A home-based business offers the kind of independence and freedom you don't always find as an employee. Unlike your 9-to-5 job, your earnings aren't limited by what is stated in your employment contract. You also can allow your creativity to fly and even get full credit for it if your product gets recognized. Ready to become an entrepreneur? Here are some important things you need to learn about business structure and the basics of proprietorship:

Proprietorship basics
Proprietorship, specifically sole proprietorship, is the simplest business structure there is. This means that you and you alone will be handling and managing your business. It is also the easiest to set up and run. Freelancing, commission-based independent work and contract-based work are some examples of sole proprietorship. Proprietorship is also the most popular business structure used for home-based businesses.

In terms of liability, being a sole proprietor also means you alone will be held liable for all obligations and transactions that occur in the course of running your business. This means that you will have to face employee and product issues, defaults on debt and lawsuits alone.

Signing an agreement or contract with a supplier, for example, will be your sole responsibility. You will also have to make your own decisions from the tiniest details to the biggest issues. It will be your name that will appear under the dotted line even if your business has its own name.

As an entrepreneur, you and your proprietorship are not legally separate. You will have to file earnings and losses on your proprietorship as part of your income tax returns. In the U.S., check IRS Form 1040 (with Schedule C).

On the positive side, every success that your business experiences is yours to enjoy. You also make decisions on your own and don't have to deal with disagreements with other co-owners or face issues of stockholder votes and meetings. You can also establish the business quickly and at little cost. The capital you need will be solely for buying materials, paying for salaries and marketing.

To run a proprietorship, you have to make it legitimate. Talk to your local business agency to find out about registration laws, business permits and licenses you have to complete and comply with.