Is a sole proprietorship the right entity for my new business?

Perhaps the most important decision you'll make when starting your business is what type of business entity you will choose. The most common business entities are a sole proprietorship, partnership, limited liability company, and corporation. The most basic entity is the sole proprietorship.

Sole Proprietorship

A sole proprietorship is when one individual operates a business. For most purposes, a sole proprietorship is seen as an extension of the individual owner and is not treated as a separate legal entity. In its simplest form it is a child at a lemonade stand. Most often it is seen with small, family owned businesses. 

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Pros

  • Is the easiest and simplest form in which to conduct a business
  • There is no paperwork needed to create a sole proprietorship.
  • Very few formal steps are needed to begin doing business.
  • For income tax purposes, income is only taxed once, i.e., the profits and losses of the business activity are reported on the owner's individual income tax return.

Cons

  • The owner is personally liable for of the debts of the business and all of the owner's personal assets are at risk.
  • The source of capital available to the business is limited to the owner and the owner's ability to borrow funds. 
  • The owner cannot seek investment since any investment would mean that the business is no longer a sole proprietorship.

Summary

Choosing a sole proprietorship is generally appropriate only when the following factors are met:

  1. The business is likely to remain small. 
  2. The type of business does not present a high risk of liability exposure. 
  3. The owner does not intend to seek outside investment. 
  4. The owner wishes to avoid the cost of incorporating and the administrative burden of adhering to corporate formalities.

If you have any questions regarding your new business, or would like to determine if a sole proprietorship is right for you, schedule a free consultation with J.Cutler Law.