A sole proprietorship is one of the simplest ways to open and manage your own business. You don’t even require to open another banking account to keep your business capitals separate from your accounts because you are eventually personally liable for your income and expenses. The bookkeeping and accounting methods are the same if you work as a sole proprietorship in your name or under a DBA, or “making business as,” designation.
Sole proprietors must keep precise financial records. They have a unique relationship with their businesses in that the assets, liabilities, and earnings of the business are truly extensions of their finances. They are usually individually liable for business debt, and personal assets can be taken to satisfy such duties. Sole proprietors must keep separate and detailed bookkeeping records to maximize tax deductions and decrease income tax liability.
What is a sole proprietorship?
A sole proprietorship is a kind of business structure that is controlled by one person. The owner is assigned to as a sole proprietor. In accounting, the balance sheet of the sole proprietorship indicates the accounting equation:
Assets = Liabilities + Owner’s Equity
Owner’s Equity holds on the owner’s capital account and also a drawing account. The drawing account is a temporary account in which the owner’s prevailing year draws or withdrawals are listed. The sole proprietor has draws because he or she does not get a salary or wages. Therefore, the income statement will not record an expense for the owner’s work. This indicates that the net income shows the entire return for the owner’s work and investment. A sole proprietorship is not lawfully separate from its owner as can be the case with a corporation. But, a sole owner may be ready to register as a limited liability company to limit his or her liability. Be sure to ask for professional advice as to the proper form of business for your situation and location.
Benefits of Sole Proprietorship
- Easy and Less Costly Organization
There are no figures to complete, and no government fees to pay, to establish a business as a sole proprietorship. Creating a general partnership typically doesn’t need any government applications. But it is advisable to have a formal partnership agreement to describe the rights and duties of the partners. Even, to settle any conflicts that may arise. Other forms of business organization may need to file some federal and state government forms, and paying significant fees.
If you choose to work your sole proprietorship under a business name that is separate from your name usually called an “assumed name” or a doing business as [d/b/a] name), they normally follow simple procedure state government form and a small fee to pay.
As a sole proprietorship does not file any organization documents or annual reports with the national or state governments. Your business operations are not directed to public disclosure like an LLC or corporation
- Minimal-to-No Reporting Requirements
It does not require to file an annual report with the state or federal governments. In most circumstances, partnerships do not require to file an annual report. But, LLCs and corporations will be expected by law to conduct some meetings of members or shareholders, and file several reports with the state government.
- Simplified Tax Reporting
There are tax advantages that are uncomplicated reporting conditions and not having to pay separate taxes for the business. Even, it does not require to file any special tax forms with the state or federal government. Usually, the only tax form a sole proprietor will file with the IRS is a Schedule C (Profit or Loss from a Business) as part of their yearly Form 1040.
Setting Up the Books
- Set separate checking, credit, and debit card accounts for the transactions of the business. Keeping business transactions left from your ones will ease bookkeeping difficulties.
- Consult with an accountant or tax professional for advice in setting up your bookkeeping system and demonstrating how to make financial statements and manage your tax liability.
- Do either paper accounting ledgers or accounting software to set up a chart of account ledgers that are suitable for your kind of business. Add income accounts to log sales of items you sell, income from services you offer, and interest your business makes on investments. Your expense accounts will be either fixed, variable, or discretionary. And must carry accounts to categorize things like rent, the cost of materials and other services you pay for to make what you sell, and supplies you purchase to run the business. Set up asset accounts for anything your sole proprietorship owns, like equipment, inventory, and bank accounts. Lastly, set accounts for liabilities such as loans, credit cards, and taxes.
- Access balances for both assets and liabilities right at the start of the accounting period. Things like inventory, equipment, your bank and credit card accounts are very valuable and these must be added to the books.
- You may consider using a double-entry accounting system. This indicates that all the actions in the book will hold a matching or balancing transaction. Suppose, when you are writing a check for your phone bill, it must be recorded as reducing checking account balance.
Additionally, it is very important to keep on refreshing your books while reconciling daily to have a tab on the present financial situation.
Accounting for a Sole Proprietorship
A sole proprietorship is a kind of business structure that is more for the startup’s option. Many small business owners begin their new business venture as a sole proprietorship. Sole proprietorships are easy business structures and do not normally need large amounts of paperwork to start. Accounting is also more comfortable for sole proprietorship businesses. Business owners with little or no accounting experience can regularly manage their company’s financial records using some basic practices.
Sole proprietorships do not need business owners to set up a large business organization. Owners can get a business license, state sales tax permit, and other industries allow needed for their business. These documents will finally begin official business operations for a sole proprietorship. Sole proprietorships hiring workers or using independent contractors will often require a federal identification number for tax purposes. Business owners may also require to get business or general liability insurance for their company.
Accounting for sole proprietorships does not normally need individuals to keep separate records for their business and personal assets. The goal is the business cannot exist in the absence of the owner. But, small business owners must seriously think is leaving the business and personal records. This gives business owners with separate data linking to their company’s profit and losses. Business owners wanting to get a salary from their business can just make owner withdrawals.
Business owners of sole proprietorship often use a separate bank account and accounting ledger. The kind of style of the accounting system does not normally matter when comparing to sole proprietorships. Business owners have full compliance with building a general ledger that works best for their sole proprietorship business. The general ledger can enter various sub-ledgers and journals. Small business owners may only require cash receipts and disbursements journal to maintain track of money coming in and going out of the business.
The Internal Revenue Service needs sole proprietorship income to be reported on the business owner’s individual income tax form. Business owners regularly fill out a separate form describing the company’s income, expenses, and assets to calculate the amount of income earned during the time year. This method is known as flow-through taxation. Sole proprietorships offer business owners an important benefit because personal income tax rates are normally much lower than business tax rates.
Public accounting firms or individual certified public accountants can assist business owners to set up their sole proprietorship accounting system. These people often have a wide range of expertise and knowledge in business accounting. Business owners can have basic accounting records during business operations and turn this information over to professional accounts for tax preparation. Using professional accountants for tax preparation often serves business owners to limit their tax liability.
Accounting compliance for a sole proprietorship
- Bank account on Sole proprietor’s name or firm’s name.
- Professional tax enrolment and registration
- Personal Income tax filing
- In the circumstance, you provide goods and services in Ecommerce platforms then you are directed to GST
- If you are a supplier that does have a temporary office and your services are seasonal like firecracker business in Diwali, you will require GST
- In the state, you have yearly revenue of more than Rs. 18 Lakh or Rs. 10 Lakh for businesses working from special cities, you will require GST
- If you are an NRI and supplying goods and services in India, you will require GST
- In the state you are a seller or broker supplying goods and services, you will require GST
- If you are supplying goods and services in states other than the registered state, you will need GST
- In case you are running on an eCommerce model, you will require GST.
Though sole proprietorship allows from various shortcomings, many entrepreneurs opt for this kind of organization because of its natural advantages. It needs less amount of capital. It is best accommodated for businesses that are carried out on a small scale and where clients demand personalized services.
Go, for such sole proprietorship if you are a startup or willing to start a small business. Accounting & Bookkeeping is equally mandatory for your business.
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