The Rules of Thumb blog from MoneyThumb strives to educate and inform our readers who run small businesses. In that vein, today let's talk about a sole proprietorship. Chances are that if you are a small business owner when you file your income tax you choose sole proprietorship as your business type. The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. The fictitious name is simply a trade name--it does not create a legal entity separate from the sole proprietor owner.
The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost. A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business. A distinct disadvantage, however, is that the owner of a sole proprietorship remains personally liable for all the business's debts. So, if a sole proprietor business runs into financial trouble, creditors can bring lawsuits against the business owner. If such suits are successful, the owner will have to pay the business debts with his or her own money.
Some small businesses choose to make their company an LLC, to avoid this issue. However, if your small business is a very simple one, with usually only the owner as the only worker, keeping your sole proprietorship is the simplest way to go. However, it is smart to understand the basics of a sole proprietorship.
From this article at Entreprenuer.com, the Rules of Thumb blog found the best information to share with you the basics of a sole proprietorship. The article was excerpted from the books Start Your Own Business and Entrepreneur Magazine's Ultimate Book on Forming Corporations, LLC's, Sole Proprietorships and Partnerships. Below we have listed the main advantages and disadvantages of a sole proprietorship as shown in that article:
Advantages of a Sole Proprietorship
- Owners can establish a sole proprietorship instantly, easily and inexpensively.
- Sole proprietorships carry little, if any, ongoing formalities.
- A sole proprietor need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
- Owners may freely mix business or personal assets.
Disadvantages of a Sole Proprietorship
- Owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business.
- Owners cannot raise capital by selling an interest in the business.
- Sole proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
The Rules of Thumb blog from MoneyThumb hopes this helps small business owners better understand a sole proprietorship. If you are just starting out in business, claiming yourself as a sole proprietor can work at first, but later you may decide you need to form an LLC. If you have questions about either one of these options, don't hesitate to leave us a comment below and we will do our level best to help you.
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