Should I Start a Sole Proprietorship?
POST DATE: 1.16.20
The new year may have you rearing and ready to start a business - congratulations, you're an entrepreneur! No matter where you are in the business formation lifecycle, there are some key facts you should consider during the formation of your new business.
The most common forms of business enterprises in use in the United States are the sole proprietorship, general partnership, limited liability company (LLC), and corporation. This post will discuss the pros and cons of one of those: the sole proprietorship.
The Basics
Ease of setup or formation.
Sole proprietorships are the simplest type of business enterprise. Sole proprietorships are not an entity, but merely an individual who owns the business and is personally responsible for its debts. A sole proprietorship can operate under an individual's name (ie: Rachel Smith) or a DBA ("doing business as") such as Smith's Country Kitchen - otherwise known as a trade name that does not create a legal entity separate from the sole proprietor owner. One can become a sole proprietor almost instantly, quite easily, and rather inexpensively, needing only to register his or her name and secure local licenses, in order to be ready for business.
Personal liability.
Owners are subject to unlimited personal liability for the debts, losses, and liabilities of the business -- that means your personal finances could be heavily impacted in the event there is a legal dispute. For example, if your business doesn’t pay a supplier, defaults on a debt or loses a lawsuit, the creditor can legally come after your house or other possessions.
Tax implications.
As a sole proprietor, you’ll have to take responsibility for withholding and paying all income taxes, which an employer would normally do for you. This includes the "self-employment tax", consisting of contributions to Social Security and Medicare, and making payments of estimated taxes throughout the year. In addition, many corporate tax advantages and write-offs are not available to sole proprietors. Another implication involves sales tax. Depending on the nature of your business -- ie. if you’re selling goods -- you may need to collect and pay sales tax that varies by state but typically ranges from 6-9%. Taxes aside, owners may freely mix business and personal assets, which may be attractive to some entrepreneurs. Sole proprietorships do not require annual reports or filings with the state in order to stay current. In fact, other than personal tax returns, nothing needs to be filed, which is in contrast to LLCs, S-corporations or C-corporations, which are typically required to file annual reports.
Limited business life.
When it's a one-person-show, the life of your business is limited. When the owner passes away, the business ends as well and will be dissolved, unless an estate plan was created, to allow the business to continue, thus requiring more legal expense and effort.
Hiring challenges.
While you can hire employees (or remain a sole employee), it may be challenging. Owners of sole proprietorships may find it difficult to attract top workers, as they can’t match the pay, benefits, prestige, and networking opportunities offered by large business entities.
In the creation, acquisition and operation of any business entity, the advice of an experienced lawyer is extremely valuable. It is important that this advice come from an attorney who is not only versed in the law, but also understands the goals of your business. At CCHA, our business lawyers know what it takes to help businesses reach their goals and have the skill and experience to set-up your business for success. Contact our CCHA Business Services group to discuss the creation, acquisition and operation of any business entity.
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