Last week, I reviewed the LLC (limited liability company). Today I’m discussing sole proprietorship, the second in my series reviewing business structures and which one is best for your business. Sole proprietorship the most simple and therefore the most common structure used when starting a business. According to taxfoundation.org, as of 2014, there were approximately 23 million sole proprietorships nationally. Other business structures like LLCs and S Corporations made up only 7.4 million combined.
As the name implies, a sole proprietorship is a business owned and operated by one individual. Sole proprietorship is automatically established based on your business activities–in essence, once you sell a product or service, you are considered a sole proprietor. There is no requirement to register with the Secretary of State, but additional state or local permits may still be necessary depending on your location and industry.
A sole proprietorship structure does not legally differentiate between your business and the owner as an individual. All debts or liability incurred through a sole proprietor’s business is the responsibility of the individual owner. There is no legal protection of the business owner in regards to debt or liability as compared to other business structures. So if a sole proprietor has financing or legal issues with the business his personal assets are automatically at risk. This can be mitigated through having proper business insurance.
Additionally, sole proprietors may want to have a business name other than their personal name. This is called a fictitious name (or assumed name, trade name, or DBA) A sole proprietor may do business under his or her name, Robert Brown for example, or may do business under a fictitious name such as Brown’s Bicycle Works. A DBA name (Doing Business As) needs to be registered with state or local government depending on your location and industry. There are a few states that do not require this registration so as always, research is necessary for each individual. A fictitious name does not create a separate business entity from the sole proprietor and the legal and financially liability remains the same.
Once a sole proprietor begins making a profit between $40,000-$50,000 and/or starts employing employees, it is strongly recommended to become organized in a legal entity. Not only is the business owner more protected legally, there are additional tax advantages that will come into play. Once we have covered all of the common business structures I will do a comparison of the tax benefits and when and why to choose each.