A sole proprietorship is a business owned by one individual. It is the simplest and most common business form in the United States. Individuals need do nothing formal to establish a sole proprietorship. A sole proprietorship is easy to form because the business is not separate from the individual owner from both a legal and tax perspective. The only restriction is that the business can have only one owner, who must be an individual. The sole proprietor is personally liable for all debts of the business. As the only owner of the business, the sole proprietor has the freedom to transfer ownership at any time and in any manner. When a sole proprietor dies, the business becomes part of the owner's estate and can be passed on to a spouse, children, or others according to the owner's desires.
When you figure your taxable income for the year, you must add in any profit, or subtract out any loss, you have from your sole proprietorship. You report your profit or loss from each of your sole proprietorship on a separate Schedule C Form 1040, Profit or Loss From Business. The amount of the business profit or loss is entered on line 12 of your individual Form 1040. Capital gains are reported separately on your individual Schedule D, Form 1040.
Each asset in your sole proprietorship is treated separately for tax purposes, rather than as part of one overall ownership interest. For example, a sole proprietorship selling an entire business as a going concern figures gain or loss separately on each business asset.