Many small businesses begin as sole proprietors or partnerships because they are relatively simple to set up. Usually, an idea, some start-up money, and a business license will have an aspiring entrepreneur on his or her way in the business world.
Sole proprietors are unincorporated businesses owned and operated by one person. Because there is no legal separation between the business and the person running it, all legal responsibility lies with the business owner. The owner is personally liable for debts and losses. All profits go to the business owner and are subject to taxation. The income statement of a sole proprietor does not show any income, since the owner is individually responsible for paying income tax.
Similarly, a partnership is an unincorporated business. In this case, all owners are liable for debts and losses. Partners are not employees, and therefore partnerships, like sole proprietors, do not pay income tax. Each partner must file a K-1 (Form 1065), which the U.S. Return of Partnership Income.