A sole proprietorship is the simplest form of business. The prevalent characteristic of a sole proprietorship is that the owner is inseparable from the business. It is not a separate entity. Because they are the same entity, the owner of a sole proprietorship has complete control over the business and its operations, and is financially and legally responsible for all debts and legal actions against the business. Another facet of the “same entity” aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.
A sole proprietor may do business with a trade name other than his or her legal name. Sometimes a sole proprietor is required to file a fictitious business name statement with a local government even if it is the same as his actual name for certain types of businesses or as a requirement to open a business banking account. Once your business is established, you must also get the necessary licenses and/or permits.
A sole proprietorship is a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and does not justify the expenses of incorporating and ongoing corporate formalities.
Points to Consider with a Sole Proprietorship
Unlimited Personal Liability for Loss: In a sole proprietorship, the owner is personally liable for the company, thus placing his or her entire personal assets and wealth at risk. If an owner is married, that owner puts the community property at risk as well.
Management and Control: The owner (sole proprietor) has total management and control over the company. However, the price for total management and control is that the owner is at risk for personal liability incurred through the acts of the owner’s agents or employees.
No Formalities: With the exception of complying with any applicable licensing requirements, there are no formalities required of a sole proprietorship. Note, however, where the business is conducted under a name which does not show the owner’s surname or implies the existence of other owners, California requires that the owner file a fictitious business name statement and publish notice.
Transferability: The owner can sell the business as he or she pleases.
Duration: The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business.
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