The simplest form of business organization is the sole proprietorship. If you choose this legal organization, then you and the business are the same. You can continue operating as a sole proprietor as long as you’re the only owner of the business.
Establishing a sole proprietorship is relatively uncomplicated. While you do not have to file articles of incorporation or organization (as you would with a corporation or an LLC), you likely will have to obtain a business or sales tax license to do business under South Dakota law or local ordinances.
A potential disadvantage of doing business as a sole proprietor is that you have unlimited personal liability on all business debts and court judgments related to your business.
EXAMPLE: Tom is the sole proprietor of a pizza store. One day Ronald, one of Tom’s employees, is delivering pizzas using a truck owned by the business. Ronald hits and seriously injures a pedestrian. The injured pedestrian sues Ronald, claiming that he drove carelessly and caused the accident. The lawsuit names Tom as a codefendant. After a trial, the jury returns a large verdict against Ronald – and Tom as owner of the business. Tom is personally liable to the injured pedestrian. This means the pedestrian can go after all of Tom’s assets – business and personal.
As a sole proprietor, you and your business are one entity for income tax purposes. The profits of your business are taxed to you in the year that the business makes them, whether or not you remove the money from the business (called “flow-through” taxation, because the profits “flow through” to the owner’s income tax return).
You can also deduct various day-to-day business expenses like car expenses, meals, travel, or entertainment. However, you will need to keep accurate books for your business that are clearly separate from your records of personal expenses. The IRS has strict rules for tax-deductible business expenses and you need to be able to document these expenses. One good approach is to keep a separate checkbook for your business and personal expenses – and pay for all of your business expenses out of the business checking account.