While the information provided here is thought to be accurate, it should not be used as a substitute for legal advice on matters related to business organization, taxes, or other business and financial management matters. Decisions about the best way to structure your business should be made after consulting with your legal and tax advisers.

The simplest business structure is the sole proprietorship, which typically involves one individual who owns and operates the enterprise. In a sole proprietorship, the business entity and your personal affairs are merged together. As the proprietor, you own and control the business.

Advantages

Because of its simple structure, a sole proprietorship is easy to set up. It is inexpensive to establish and operate, and you make all decisions related to the business. It also has the least reporting requirements of all the business structures.

If you operate your business as a sole proprietorship, your business expenses and income are included on your personal federal income tax return, Form 1040. Profits and losses are recorded on the Schedule C form, which is filed with your 1040. The profit or loss that is documented on Schedule C is recorded on your 1040 form; therefore, if your business suffers a loss, it may offset the income you have earned from other sources, thus reducing the taxes you owe.

In addition to Schedule C, a sole proprietor must also file a Schedule SE, which is used to calculate self-employment tax. In addition to paying an annual self-employment tax, you must also make quarterly estimated tax payments on your income. The federal government allows you to pay estimated taxes in four equal amounts throughout the year on the 15th of April, June, September and January. Unlike some other business structures, business earnings from a sole proprietorship are taxed only once.

Disadvantages

One of the disadvantages of operating your business as a sole proprietorship is liability. In this business structure, you are personally responsible for your company's liabilities, which means your personal assets are at risk and could be seized to satisfy a business debt or legal claim against you.

You may also find it difficult to obtain financing for your sole proprietorship, as some banks, financial institutions and investors are reluctant to make business loans to sole proprietorships. In most cases, you will have to rely on your own financial resources — such as savings, home equity or family loans — to fund your enterprise.