Sole Proprietorship Basics
Many sole proprietors may not even realize that, legally, they are designated as such. Because of the simplicity of a sole proprietorship, individuals can operate their businesses with little administration or legal formality. A sole proprietorship is a business that is owned by one person who reaps all the benefits and is responsible for all the losses and obligations of the business. An overview of the benefits and risks of a sole proprietorship follows.
Liability in a Sole Proprietorship
An individual business owner runs a sole proprietorship, and any financial actions the owner takes as a sole proprietor are in the name of the business. The owner of a sole proprietorship faces unlimited personal liability. If the business is sued because of a contract dispute, a personal injury or any other reason, the owner’s personal assets may be at risk if he or she loses the lawsuit. For example, if the sole proprietor of a snack cart is sued for wrongful death caused by food poisoning, he or she may have to pay for the damages by mortgaging his or her house, with personal funds, or through other means.
Taxation of Income From a Sole Proprietorship
Income from sole proprietorships is taxed as personal income of the owner. Owners may want to adopt business and personal accounts as an accounting best practice. Owners may also obtain certain tax benefits through deductions of business expenses.
Sole Proprietorship’s Advantages
The simplicity in organizing, running and accounting for assets and liabilities of a sole proprietorship make it an attractive option for many business owners. A sole proprietor need only hang a shingle to start his or her business.
Of course, the sole proprietor is also responsible for financing all business moves, but carrying the risk for these business endeavors can pay off as the sole proprietor does not have the added expenses that more formal business structures necessarily incur. A sole proprietor also controls all of the business decisions, so the owner does not have to wait for agreement among many partners or members before seizing on a business opportunity.
Sole Proprietorship’s Disadvantages
As stated before, the sole proprietor is personally responsible for all business losses and obligations. This unlimited personal liability makes it one the most financially risky of all ownership types. The sole proprietorship also does not allow for tax planning because income from the business will be taxed at the rate that applies to the individual owner. The sole proprietorship can exist throughout the life of the owner, but it ends at his or her death unless the business is sold to another. Business assets must generally be transferred by sale, as well.
While sole proprietorships have these advantages and disadvantages, they must also comply with applicable state and federal laws and regulations, including labor and employment laws, as must any other business.
Sole proprietorships are an easy business vehicle for getting an idea or service onto the market and into the hands of consumers. Depending on the needs of the business, a sole proprietor may decide to organize the business more formally, but a sole proprietorship can serve as a useful tool for many business owners to gain entry to the market. A skilled business law attorney can advise you on your business concerns.
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