Proprietorship sole is the simplest legal structure if
you're going into business on your own. A proprietorship sole is a one-person
business that is not registered with the state as a corporation or a
limited liability company (LLC). Essentially, there is no separation of the
business from the owner in the formation of a sole proprietorship.
In some states, a sole proprietorship is referred to as a
DBA (doing business as), as in "Jos' Smith, doing business as Smith
Heating and Air Conditioning."
There is no need for hiring a lawyer, there's no need for
corporate paperwork and fees, and you can be in operation tomorrow,
theoretically.
Establishing a proprietorship sole is cheap and relatively
uncomplicated. You don't have to file any papers to set it up -- you create a proprietorship
sole just by going into business.
Without knowledge of yourself, you may have experienced
proprietorship sole, which are so easy to set up and maintain.
For instance, if
you are a freelance photographer or writer, a craftsperson who takes jobs on a
contract basis, a salesperson who receives only commissions, or an independent
contractor who isn't on an employer's regular payroll, you are automatically said
to be having proprietorship sole or you may be called as sole proprietor.
However, although a proprietorship sole is the simplest of
business structures, you shouldn't doze off at the wheel. In order to maintain
legitimacy of your business, you may have to abide by local registration,
business license, or permit laws.
Moreover, when it comes to tending your
business, you should look sharp since for paying both incomes taxes and
business debts, you are personally responsible.
For any business-related obligation, a sole proprietor can
be held liable in person. This means that the creditor can legally come after
your house or other possessions if your business doesn't pay a supplier,
defaults on a debt, or loses a lawsuit.
Given below are two examples of Proprietorship Sole in case
of personal liability for business debts.
Example 1:
George is the owner of a small manufacturing business. When
business prospects look good, he orders $50,000 worth of supplies and uses them
in creating merchandise.
Unfortunately, there's a sudden drop in demand for his
products, and George can't sell the items he has produced. When the company
that sold George the supplies demands payment, he can't pay the bill.
As sole proprietor, George is personally liable for this
business obligation. This means that the creditor can sue him and target not
only George's business assets, but also his personal property. This can include
his house, his car, and his personal bank account.
Example 2:
Samuel is the owner of a flower shop. One day George, one of
Samuel's employees, is delivering flowers using a truck owned by the business. George
strikes and seriously injures a pedestrian. The injured pedestrian sues George,
claiming that he drove carelessly and caused the accident.
The lawsuit names Samuel as a co-defendant. After a trial,
the jury returns a large verdict against Samuel as owner of the business. Samuel
is personally liable to the injured pedestrian. This means the pedestrian can
go after all of Samuel's assets, business, and personal.
Sole Proprietorship - Points to Ponder
- The
startup costs for a proprietorship sole are minimal.
- Owner
has unlimited liability. Both the business and personal assets of the sole
proprietor are subject to the claims of creditors.
- Because
a proprietorship sole is not a separate legal entity, it usually
terminates when the owner becomes disabled, retires, or dies. As a result,
the proprietorship sole lacks continuity and does not have continuous
existence like other business organizations.
- All
profits and losses of the business are reported directly to the owner's
income tax return.
- It is
difficult for a proprietorship sole to raise capital. Financial resources
are generally limited to the owner's funds and any loans outsiders are
willing to provide.
- Owner
could spend unlimited amount of time responding to business needs.
- Easiest
type of business organization to establish. There are no formal
requirements for starting a proprietorship sole
- Decision
making is in direct hands of owner.
Setting up a sole proprietorship takes minimal effort. It's
also the simplest type of business to structure and operate.
Steps
- Find
out which local, state, and federal licenses and permits you need. Obtain
them by contacting the Small Business Administration (SBA).
- Ensure
that you have the right to use your chosen business name by checking with
the office of deeds or the appropriate city office in your area. If you
don't know which office to call, call the SBA. This way you can verify that
the name has not already been taken.
- By
registering the name of your business in the county where you do business,
get a Fictitious Business Name Statement.
- Apply
for an employer ID number with the IRS using Form SS-4.
- Apply
for a state ID number with the Department of Revenue in the state in which
you are forming your proprietorship sole. You need to have this number if
you pay wages to employees, pay excise tax or have a Keogh retirement
plan.
- Consider
getting business insurance to protect your personal assets.
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