A sole proprietorship is an unincorporated business owned by one person.
It is a popular business structure because it is simple, easy to form and operate and subject to few rules and regulations. Unlike limited liability companies (LLC) and corporations, no paperwork needs to be filed with the government to create a sole proprietorship. In a sole proprietorship, the owner has complete control over the management of the business and retains all profits of the business. If you are planning on opening a business and are considering a sole proprietorship, talk to an attorney at SODEN & STEINBERGER, APLC in SAN DIEGO, CA, who can advise you of the advantages and disadvantages of this type of structure.
While the sole proprietor has total control over the business, he or she can hire employees and enter into agreements with landlords or lenders. A sole proprietorship can be operated, in some circumstances, by a husband and wife combination. The line between a sole proprietorship and a partnership tends to merge in those situations, though. It is important to involve an attorney in such situations to identify any potential problems that could arise from a family business scenario.
Sole proprietorships are often operated in the name of the owner. If the owner’s name is not used, then the owner may be required to file a “fictitious name” certificate with the appropriate state authority. Many states also do not allow businesses to use the terms “Inc.,” “Co.” or other incorporated terms of art unless the business is, in fact, incorporated.
A sole proprietorship ends upon the death or withdrawal of the proprietor or if the proprietor sells the business’s assets to another party. When sole proprietorships begin to grow, they can incorporate or convert the business to a LLC. Converting a sole proprietorship to a LLC is often done to limit personal liability and to take advantage of certain tax breaks available to LLCs.
In a sole proprietorship, the business and the owner are legally inseparable, meaning that the owner reports the income or losses of the business on his or her personal tax returns. More importantly, this also means that the owner is personally liable to creditors of the business. Likewise, creditors can seize assets of the business to satisfy any claims that they may have against the owner personally. A sole proprietorship does not afford the owner the same protections from liability that a LLC and corporation can provide.
Advantages and disadvantages of sole proprietorships
The advantages of a sole proprietorship include:
- Ease of formation and operation
- Can deduct business losses on personal tax returns
- Has no double taxation like some other business structures
- Owner has total control of the business
The main disadvantages of a sole proprietorship include:
- Unlimited personal liability
- Can only have one owner
- Upon the death of the owner, the business legally ceases to exist
Speak to a business law attorney
Sole proprietorships are a popular means of conducting business, but they are not without risks. If you are considering opening a business, an attorney at SODEN & STEINBERGER, APLC in SAN DIEGO, CA, can help make sure that you are on the right track.
