LLCs have been the “hot” business structure for small businesses for some time now. Before them, subchapter-s corporations had the buzz. But when considering a structure for a small business, don’t forget the sole proprietorship.
Defining Sole Proprietorship
Often, legal and business terms are confusing. Not this time—a sole proprietorship is when one person is the sole owner, or proprietor, of a business. Here are other sole proprietorship basics:
- There is no separate legal entity, as with a corporation or LLC. The sole proprietor is the business.
- Profits and losses are reported on the proprietor’s own tax return, and the sole proprietor can deduct business expenses directly from his income.
Sole Proprietorship: Advantages vs. Disadvantages
Sole Proprietorship Advantages
- Sole proprietorships are simple—no need to incorporate or form an LLC; no need to track the revenue and costs of a separate entity.
- Since the sole proprietor is the only owner, it avoids the major practical partnership disadvantage—having to share control with another person or persons (the partners), as well as apportion profit and losses in a way that all the partners can agree with.
- A sole proprietorship has the same tax structure as an LLC or sub-s corporation.
Sole Proprietorship Disadvantages
- Because a sole proprietor is effectively self-employed, he or she has to pay the “self-employment tax,” also called the sole proprietorship tax: not only does the proprietor pay the employee share of Social Security and Medicare tax, he or she has to pay the employer portion, too.
- A sole proprietorship could also be called an “unlimited liability proprietorship.” Because there is no separate legal entity to shield the owner’s personal assets from business-related debt, anything the sole proprietorship owes or has to pay, the proprietor has to pay. (Having adequate insurance goes a long way to negating this risk.)
Sole Proprietorship Business Structure Lawyer Assistance
What sort of business structure to adopt is the first big decision a new business owner needs to face. An experienced sole proprietorship business structure attorney can explain the pros and cons of each structure as they relate to the owner’s situation. The attorney can also make sure the business is set up and registered properly.
