Sole proprietorships, by definition, are unincorporated businesses consisting of one individual owner. The exception to this rule is if a husband and wife jointly own a company. In this case, under the Small Business Work Opportunity Act of 2007, they would be able to treat the business as two separate sole proprietorships rather than a partnership. This election is available only if the married couple files a joint return.
The simplest way to determine if a sole proprietorship is the right structure for your business is to weigh its pros and cons.
Most businesses in this country, about 75%, are structured as sole proprietorships. With all the structures available, sole proprietorships are the simplest and least expensive to form. There are no legal formalities to follow unlike some of the other structures, such as a limited liability company (LLC) or a corporation where you have articles of organization and operating agreements to file. In a sole proprietorship, the owner has complete control, and all of the business’s profits are taxed on his personal tax return (Schedule C). This avoids any “double taxation” that corporations are subject to. Another great advantage to sole proprietorships is they are as easy to dissolve as they are to form. This means if you wanted to close your business tomorrow, you could do so without having to file any paperwork.
The largest disadvantage to this type of business is the unlimited personal liability of the owner. Any debts of the business are considered debts of the owner. In the case of default on debts for lawsuits, actions can be taken against any of the owner’s personal assets such as his house, car and/or any personal possessions. There are also issues regarding the difficulty in being able to raise capital, hire employees and significantly grow the business. It can be difficult to raise capital because shares of the business cannot be sold. There is also a smaller sense of legitimacy relative to businesses that are organized as corporations or LLCs.
Sole proprietorships are typically recommended for entrepreneurs where their market is small and local, their customers require personal attention, their capital requirement is small, there is not much liability involved, and where the nature of their business is simple. Examples of these types of businesses include bookstores, antique shops, hair salons, tailoring shops and auto repair shops.
If you would like additional information regarding this issue or any other tax related issues, please contact Henssler Financial at 770-429-9166 or [email protected].