Sole Proprietorships

A sole proprietorship is an unincorporated business owned by one person. It is a popular business structure because it is very easy to form and operate. No paperwork must be filed with the government in order to create a sole proprietorship, as is the case with limited liability companies (LLCs) and corporations. One disadvantage of a sole proprietorship is the fact that the business and the owner are legally inseparable, meaning that the owner reports the income or losses of the business on his or her personal tax returns. More importantly, this also means that the owner is personally liable to any potential creditors of the business. Likewise, creditors can seize assets of the business to satisfy any claims that they may have against the owner personally. A sole proprietorship does not afford the owner the same protections from liability that a LLC and corporation can provide. For this reason this structure is not usually recommended except for the conceptual start up.

In a sole proprietorship, the owner typically supplies all of the management and labor, but a sole proprietorship can have employees. A sole proprietorship can be operated, in some circumstances, by a husband and wife combination. The line between a sole proprietorship and a partnership tends to merge in those situations, though. It is important to involve an attorney in such situations to identify any potential problems that could arise from a family business scenario.

Sole proprietorships are often operated in the name of the owner. If the owner's name is not used, then the owner may be required to file a "fictitious name" certificate with his or her local government. Many states also do not allow business to use the terms Inc., Co, or other incorporated terms of art unless the business is, in fact, incorporated.

When sole proprietorships begin to grow, they typically incorporate or convert the business over to an LLC. This is mostly to avoid personal liability and to take advantage of the various tax breaks that the government provides.

Advantages:

• Ease of formation and operation.
• Can deduct business losses on personal tax returns.
• Has no double taxation like some other business structures.
• The owner has total control of the business.

Disadvantages:

• Unlimited personal liability.
• Can only have one owner.
• Upon the death of the owner, the business legally ceases to exist.

Conclusion:

Sole proprietorships are a popular means of conducting business, but they are not without risks. If you are considering opening a business, you should contact a lawyer to make sure that you are on the right track.