A sole proprietorship is the business structure of choice for a single-person organization that is not incorporated. In essence, a sole proprietor is the owner of the business and may be its’ only employee. This can be a suitable business structure for various types of workers, such as independent contractors and freelance workers. But before becoming a sole proprietor, it is a good idea to evaluate whether this is the right arrangement for your business and individual needs.
Administrative simplicity. If you prefer to run a business free of copious registration and reporting requirements, then a sole proprietorship is a good option. This type of business entity is not typically subject to state or federal regulations, which differentiates it from a limited liability company or a corporation. There are no standards set forth by the government regarding structure or managerial duties. Other than registering the name of the business with the state agency, business owners can run their business with minimal oversight. For those with a small business and few or no employees, this may be an attractive feature.
Liability protection. A sole proprietorship does not offer its owner limited liability protection. Thus, if a sole proprietor is sued, a claimant can attempt to acquire personal assets in addition to his business assets in a judgement. The absence of limited liability is one of the most significant drawbacks of sole proprietorship and should be carefully considered. While every business should regard litigation as a possibility at some time, for some types of businesses this may be a more significant and probable risk than for other ventures.
Access to capital. Sole proprietors have a measurably more difficult task in attracting funds from investors to expand their operations. Many sole proprietor’s only source of capital is their personal funds or consumer loans. Business owners who already have access to large amounts of capital or investment opportunities may not be affected by this limitation.
Tax implications. A sole proprietorship is considered a “pass-through” entity for tax purposes. Income earned by the business is treated as the personal owner’s income on his tax return. This arrangement provides for relatively simple tax preparation and the owner pays only personal income taxes on the profits of his business. However, some business owners may want to separate their personal and business taxes for various reasons.
Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.