A business created before or after marriage is often a contentious issue which ends in litigation when filing for divorce.
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A sole proprietorship is a business formed by one person. A sole proprietorship does not have to be registered with the state of California – a definite benefit for those who may be trying to limit their expenses and initial paperwork. The fact is, there are many entrepreneurs who have established a business as a sole proprietorship without realizing they have done so! Those who perform contractual work, work only for a commission, or operate as an independent contractor are functioning as sole proprietors (assuming that they have not formed another business entity).
What many entrepreneurs don’t realize is that although they may not fall under any state regulation, there are often local rules that require them to either register their business, obtain a business license, or to get a permit to function as a legitimate business. The entrepreneur will also have to obtain an employer identification number (EIN) if they have employees.
The major drawback to a sole proprietorship is that the entrepreneur is exposed to personal liability. The person who operates as a sole proprietor is personally liable for any and all business debts and obligations. This means that if their business fails to pay a debt or is sued, the individual owner will be obligated for that debt. Operating as a sole proprietor exposes your home and personal property to a creditor’s claim – a chance you may not want to take, especially if you have other assets.
The Internal Revenue Service does not make a distinction between the individual and their sole proprietorship for tax purposes. This means that for tax purposes, the owner of the sole proprietor simply reports all income and losses from the business on their personal tax return (Form 1040 and Schedule C).
The owner of a sole proprietorship must withhold and pay tax on their income and on the income of any employee. This sole proprietor must withhold taxes for contributions to Social Security, Medicare and pay estimated taxes throughout the year.
If you are operating your sole proprietorship under a name that is different from your own or a “nickname,” you must register that name as a business with your county. California Business and Professions Code section 17910 requires that every person who regularly transacts business for profit under a “fictitious business name” to:
- File a statement with the county in which the principal place of business is located and
- Publish a statement about operating under this fictitious name in a newspaper of general circulation in the county in which the business is located.
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