Business Entity 101 – Sole Proprietorship

WHAT IS A SOLE PROPRIETORSHIP?

A sole proprietorship is a business that consists of only one person.  The business and the owner are the same person.

WHAT ARE THE DISADVANTAGES OF A SOLE PROPRIETORSHIP?

The sole proprietor’s assets are at risk for all of the debts and liabilities of the business. A sole proprietor can minimize the risks with insurance, but the liabilities may exceed the insurance leaving his assets at risk.

The ability to raise capital is also very limited. A sole proprietor cannot borrow funds as an investment and remain a sole proprietor.

WHAT ARE THE ADVANTAGES OF A SOLE PROPRIETORSHIP?

There are no corporate formalities. The sole proprietorship does not have to pay the minimum franchise tax that limited liability companies and corporations are required to pay.

HOW DO I TERMINATE A SOLE PROPRIETORSHIP?

A sole proprietorship terminates when the sole proprietor dies or becomes incapacitated. There are no formal procedures for terminating a sole proprietorship.

IF I DO PLAN TO OPERATE AS A SOLE PROPRIETOR, WHAT SHOULD I DO?

1. Buy insurance.

2. You still need to apply for and obtain business permits and applicable licenses.

(For more info on permits and licenses, please visit my previous post here.)

3. You need to report the business income. You will file a Schedule C when you prepare your taxes.

4. Maintain a separate bank account for the business.

by Attorney Judith Elaine Hoover on 06/27/12

Disclaimer: The contents on this blog are informational only and not meant, intended, nor should be considered legal advice, advertisement, or solicitation for business. The material posted on this blog is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Furthermore, the information contained on this blog is not specific to any particular set of circumstances. All links to outside information are meant to provide further information on the topic addressed, I make no warranties, express or implied, as to the accuracy of the information contained herein or in the attached links.

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