Sole proprietorships

A sole proprietorship is the simplest form of business. An important reason for this is that it is the least regulated of all types of business structures. Technically, the sole proprietorship is the traditional unincorporated one-person business. For legal and tax purposes, the business is the owner. It has no existence outside the owner. The liabilities of the business are personal to the owner and the business ends when the owner dies. On the other hand, all of the profits are also personal to the owner and the sole owner has full control of the business.

The most appealing advantage of sole proprietorships is the total control the owner has over the business. The owner has total control because a sole proprietorship is owned entirely by one person, although the owner may have others working for him as employees. This is different from other business entities in that the control may lie in the hands of many other partners, a board of directors, or a general partner.

Another advantage is the relative ease with which it can be started. All you have to do is obtain the appropriate licenses and permits from your local government and you may begin your business. Record keeping is usually much simpler with a sole proprietorship than with other kinds of business organizations and filing tax returns is far simpler than for a partnership or corporation. Another important advantage of the sole proprietorship is that the owner is the sole beneficiary of the profits and does not have to share profits with a partner, as in a partnership, or with other stockholders, as within a corporation or limited liability company. A final and important advantage to the sole proprietorship is the various tax benefits available to an individual. The losses or profits of the sole proprietorship are considered personal to the owner. The losses are directly deductible against any other income the owner may have and the profits are taxed only once at the marginal rate of the owner. In many instances, this may have distinct advantages over the method by which partnerships are taxed or the "double taxation" of corporations, particularly in the early stages of the business.

Although there are advantages to sole proprietorships, there are major disadvantages to it as well. The main disadvantage is unlimited liability. If you operate a business as a sole proprietorship, the law considers the business to be nothing more than an extension of you, the owner. If a product you manufacture causes injury to a user, you may be held personally liable for the damages the user suffers. If you fall behind on payments to suppliers and lenders to your business, they may attach your personal assets, such as your car and home, in order to assure themselves of payment. If your business fails, you will be personally liable for paying off the business' debts, even if it means filing for personal bankruptcy.

Numerous examples of sole proprietorships exist. A street vendor, plumber, carpenter, sellers on eBay* and shop owners, for example a delicatessen or clothing store, are all examples of sole proprietorships. All of these people work for themselves and are able to dictate everything about their business, keep the profits, and supply all of the capital the business needs.

We feel that in most cases the disadvantages associated with unlimited liability outweigh the various benefits derived from sole proprietorship. Unless the business is more of a simple personal service operation with little chance of any liability, we do not generally recommend sole proprietorships to our clients.

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