A sole proprietorship is the simplest business structure you can operate under. It is technically not a legal entity—it is just a single person who owns the business and is personally responsible for its debts. The business can operate under the name of its owner or under a fictitious trade name.
Sole proprietorships are popular because they are simple to establish and relatively inexpensive. All you need to do is register your trade name with the Virgin Islands Corporate and Trade Name Division of the Office of the Lieutenant Governor and secure the proper licenses with the Virgin Islands Department of Licensing & Consumer Affairs, then you can begin doing business.
Of course, the primary disadvantage is that you will be personally liable for any of the business’s debts. If your business runs into financial problems, creditors can direct their lawsuits to you, rather than the structure of your business. If those lawsuits are successful, you’ll have to pay out with your own money, which could be a significant financial burden. You also are not able to raise any capital by selling interest in your business, and the business itself likely will not survive if you retire or pass away, unless you change structures later on.
There are, however, several benefits associated with the structure:
- As mentioned, it’s easy and relatively inexpensive to establish a sole proprietorship; you do not even need to file any sort of paperwork or form to establish the business structure
- Sole proprietorships have few ongoing formalities
- Owners can mix their business and personal assets freely, meaning you don’t have to worry about maintaining and tracking separate accounts
- You do not need to pay unemployment tax on yourself
What to know about sole proprietorship taxes
Because a sole proprietorship is the same, in essence, as its owner, the taxation for a sole proprietorship is much simpler than other forms of business structures. The income earned through your sole proprietorship is income earned by you as the owner. You report all income and losses/expenses by filling out and filing a Schedule C form, along with your standard Form 1040. The bottom line amount from your Schedule C gets transferred to your personal tax return. This can be beneficial in some circumstances, because any losses suffered by your business could offset income earned from other sources.
You are also required as a sole proprietor to file Schedule SE along with Form 1040. This form calculates how much self-employment tax you owe. You do not need to pay unemployment tax, but if you have any employees, you will need to pay it on their behalf.
If you’re interested in learning more about the advantages and disadvantages of running a business as a sole proprietor, contact a corporate planning attorney in the U.S. Virgin Islands.
Steven K. Hardy is Chair of the Corporate, Tax and Estate Planning Practice Group at BoltNagi PC, a full-service business law firm based on St. Thomas, U.S. Virgin Islands.