Guide to Operating a Sole Proprietorship | Legal Form Articles

There are numerous advantages to operating a business as a sole proprietorship, but there are also pitfalls. By understanding the actual operation of a sole proprietorship and the framework of laws within which sole proprietorships operate, it is easier to avoid the difficulties that come with the sole proprietorship form of business.

Sole proprietorships are the most common form of business operation. This is due, primarily, to the simplicity of this form of business. They are the easiest to set up. They are flexible. The taxation of sole proprietorships is relatively easy to understand. They allow the business to be under the complete control of the owner, and, unlike corporations or limited liability companies, they have very few paperwork requirements for compliance with state regulations.

Formation of a Sole Proprietorship:

The formation of a sole proprietorship requires no special registration requirements in any state, beyond the registration of the use of a fictitious name for the business. There may, of course, be particular registration requirements that apply to the particular business that the sole proprietorship may be engaged in, for example, the sale of firearms or the packaging of food products. Thus, the formation of a sole proprietorship is a relatively simple matter and is accomplished by the act of beginning to engage in business

Each year thousands of individuals begin their sole proprietorship businesses with little or no preparation or planning. Although this type of business is simple to begin, it is also prone to failure for the same reason. Starting a business as a corporation, a limited liability company, or even a partnership requires more paperwork and planning, and thus allows the business owners a greater opportunity to make careful, well thought out decisions at the planning stages of the business.

Sole Proprietorship Property:

There are a few general rules that govern sole proprietorship property. Property acquired by a sole proprietorship is the property of the owner of the sole proprietorship. Unlike a corporation, limited liability company, or partnership, the sole proprietorship is not, itself, a legal entity for the purpose of holding property. This means that the sole proprietorship is ignored for property purposes and the general laws relating to the ownership of property will apply. Thus, if a sole proprietor is married, the particular state laws that apply to the acquisition of property by a married person will apply. In many ways, this simplifies the issue of property ownership for the sole-owner business. It allows for easy transfer or sale of any business property by the sole owner. However, it also means that in order to obtain financing, the sole proprietor must be personally liable for any mortgages or debts incurred for the purchase of business property.

Sole Proprietorship Liability:

According to The Dominguez Firm’s Personal Injury Lawyers, the owner of a sole proprietorship is personally liable for any loss or injury caused to any person in the course of the business, the person is allowed to look for a Rochester personal injury lawyer and file a claim against the owner. The owner of a sole proprietorship is also personally liable for any debts and obligations of the sole proprietorship. This issue is the major difference between operating a business as a sole proprietorship and operating as a corporation or limited liability company. In both corporations and limited liability companies, most states now allow one person to own and operate the company as a sole owner. However, as long as they comply with the extensive paperwork requirements of operating the corporation or limited liability company, the sole owners of those types of businesses do not place their personal assets at risk in the company’s business. What this means is that if the sole owner of a corporation defaults on a loan that was made in the name of the corporation, only the assets of the corporation itself may be reached by the creditor in a court proceeding and judgment. If a sole proprietor defaults on a business loan, all of the personal assets (including the sole proprietor’s own home) are at risk to collection and enforcement of a claim by a creditor.

This seemingly great disparity in liability is, in fact, not so great in the real world of business. Unless a corporation or limited liability company has sufficient other assets to offer as collateral for a business loan, virtually all financial institutions will require that the owners of a corporation or limited liability company personally obligate themselves to pay back the loan, thus putting their personal assets at risk in the same way as a sole proprietor. Regarding liability for injuries sustained by customers or employees, business liability insurance can provide security from the loss of personal assets for a sole proprietor. The actual day-to-day difference for a business caused by the personal liability of a sole proprietor is, in fact, minimal.

Sole Proprietorship Books and Records:

Unlike corporations, partnerships, and limited liability companies, the owners of sole proprietorships are not required by state law to keep books and records. Although there are no state regulations relating to record-keeping, every sole proprietorship is required to keep sufficient records to comply with Federal tax requirements regarding business records.

In general, the laws that relate to the affairs and conduct of an individual apply equally to the affairs and conduct of the owner of a sole proprietorship. Because the sole proprietorship form of business is not a legal entity itself, there is no effect from this type of business structure on the operation of laws relating to liability, property, taxation, or any other laws.

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