What is a Sole Proprietorship? Part 1 of 3: Organization and Structure

The following is the first part of three discussing the basics of a sole proprietorship entity.  This will be an ongoing blog series involving different entity choices and aspects of them.  Visit back from time to time to learn more and see when new posts are available!

 

Organization and Structure

 

A sole proprietorship essentially comes into existence when a single individual begins running his or her own business.  Yes, you should get a business license, a federal employer ID number, insurance coverage, and file a fictitious name statement, but “hanging a shingle” is about all there is.  A sole proprietor can hire employees or independent contractors, but the sole proprietor is the only owner.  If a sole proprietor takes on another owner—or vests someone else with enough responsibility to make them a de facto owner—the law will very likely treat that business entity as a partnership.

 

The benefits of a sole proprietorship are that it is often the simplest, quickest, and cheapest business entity to form and manage.  As a sole proprietor, sole management authority rests in you as the business owner.  Depending on your personality and risk tolerance, this characteristic can either be a benefit or a drawback.

 

With sole ownership and management responsibility comes personal liability.  This is the most important point about sole proprietorships: a sole proprietor is personally liable for all of the debts and obligations of the business.  In other words, if you were subject to a judgment from a lawsuit that exceeded the amount of capital you had contributed to your business plus any accumulated revenue, the defendants could go after your personal assets to satisfy the judgment.

 

Taxation and Formation forthcoming in future blog posts!

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