Business Entities Part 2: Sole Proprietorship

Business Entities Part 2: Sole Proprietorship

Formation

A sole proprietorship is the most basic form of business entity. There are no formalities, such as filing forms with the government, that are required. Although, there are some license and business registration requirements and you must comply with fictitious business name requirements. Otherwise, once you invest time and money in a new business, you are a sole proprietor.

Liability

In a sole proprietorship, the business and the owner are considered one entity. Therefore, the corporate shield discussed in part 1 does not apply. The owner of a sole proprietorship is personally liable for any liability of the business. Since the business owner is personally liable for the debts and obligations of the business, all of the owner’s assets are at risk. As such, some sole proprietors purchase insurance to cover against liability. Of course, insurance does not cover all circumstances and is limited in amount.

Capital Investment

Certain business owner’s choose to finance the growth of their business through outside investment, such as by selling shares of the company. Anybody that has seen the show “Shark Tank” has seen this mechanism in action. Think, “For $35,000, I will give you 10% of my company”.

Any business intending to grow using this method, or other types of outside investment methods, should consider forming a different type of business entity. The sole proprietorship is simply not set up for this type of investment.

Tax Considerations

One of the most significant benefits of a sole proprietorship is avoiding double taxation. As discussed in part 1, certain business entities face the issue of double taxation. However, the sole proprietorship is not considered an entity that is separate from the business owner and therefore does not pay taxes separately.

On the other hand, a sole proprietorship cannot take advantage of certain tax “fringe” benefits. Corporations can take advantage of these benefits, as will be discussed in the corporations part of this overview.

Summary

Overall, the sole proprietorship provides simplicity in operation, formation and taxation, at the cost of personal liability and losing out on “fringe” tax benefits.

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Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.

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