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Is Sole Proprietorship the Right Business Structure for You?

You have a skill or a service to provide and now is the best time for you to start a business of your own.  Having done some research on the various types of business structures has left you with more questions than answers.  The most common forms of business entities are a sole proprietorship, a corporation, a limited liability company or a partnership. A sole proprietorship is basically an individual running an unincorporated business.  It is an attractive option for you, as you have limited assets for start up money and wish to endeavor into entrepreneurship as a sole owner.  It is a business structure that is used by many freelancers, consultants, contractors and home based businesses.  There is minimal record keeping required, as it is not formally incorporated with a state filing. It has flexibility, as it is not restricted by a formal business structure. That means there are no annual meetings, board meetings and the owner can make all the business decisions independently. Without having employees, there is no concern about group health insurance, workers’ compensation coverage and the like.  But is it really the right option?

   A sole proprietorship is a legal enterprise, whereas one person represents the company legally and fully. It is the most common business entity, however with it comes many legal, financial and business risks. That said, you have unlimited liability for the debts of the business. For example, a lawsuit from a creditor or a customer, for business related debts, injuries or insufficient service can put you into personal bankruptcy. In a sole proprietorship, taxes are filed with your personal taxes and an estimated tax amount is sent to the Internal Revenue Service quarterly.  In the event of an Internal Revenue audit, by co-mingling your business and personal taxes, you will be audited for both.   Another aspect of being a sole proprietor is that you are in charge of every detail of the business.  This includes, but is not limited to, marketing, financing strategy, leadership, providing customer service and actually doing the work. This may sound appealing, but in actuality, it can be a daunting task.   Even in a small business, this usually means long hours for work which can result in physical and mental exhaustion. Or if illness or injury is incurred, this could be the reason your business has failed.   Business loans are generally not available to sole proprietorships.  Most owners use personal funds, personal loans or credit cards which can come with high interest rates.  It is difficult to raise cash to grow the business, although there are some options such as crowd funding, angel investors and business grants.

The Boutty Law Firm understands the complicated world of business law and can provide guidance in choosing an appropriate business entity for your organization. There are pros and cons for each one and it is crucial that you make the right choice.  The Boutty Law team can assist with necessary county and state licenses, zoning and permits that are needed for many business operations.  Every business is unique and you need to be well informed about the legal ramifications of choosing the right or the wrong business structure.  Call today for an appointment.   

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