A sole proprietorship is the most common form of business structure. A sole proprietor fully owns and manages the daily operations of the business. He can sell the business at his or her sole discretion. In contrast to other business forms, a sole proprietorship is among the least cumbersome of business structures. It has few compliance and regulatory obligations, minimal legal costs in the formation stage and very few formal maintenance obligations.
Due to its low startup costs and bureaucratic simplicity, new owners of small businesses may be persuaded to start a sole proprietorship. However, there are several significant drawbacks to establishing a sole proprietorship, including exposure to personal liability, lack of investment interest and payment of self-employment taxes, which should be carefully evaluated.
Personal liability. Among the most significant disadvantages of this business structure is that the sole proprietor bears personal liability for the obligations, debts or violations of the business entity. In addition, the sole proprietor can be held legally responsible for any unlawful acts committed by his or her employees. This liability allocation starkly contrasts with the limited liability enjoyed by corporations and limited liability companies.
Attracting investors. The initial funds of a sole proprietorship are generally provided exclusively by the owner. Sole proprietorships are not able to sell shares in the business. Moreover, it may be difficult for a sole proprietorship to attract other sources of funding due its small size and lack of means to draw investment sources.
Taxation issues. The owner of a sole proprietorship is taxed on the income of the business on his personal tax returns. The business does not file a separate tax return as a distinct entity, which reduces accounting and tax filing costs. However, as the owner is actively engaged in the operation of the business and the income generated therein is considered self-employment income, he or she is required to pay self-employment taxes. This includes Social Security, Medicare and other taxes. In addition, certain benefits may not be deductible, such as health insurance for employees of the sole proprietorship.
A business owner who is interested in starting a sole proprietorship should consult an attorney who has years of experience in assessing the best structure for individual businesses. DeAnn Flores Chase and the team of experienced attorneys at Chase Law Group, P.C. can explain in detail the benefits and limitations of sole proprietorships and assist you in choosing the most advantageous structure for your business. Contact Chase Law Group, P.C. at (310) 545-7700 or visit www.chaselawmb.com to schedule a consultation.