The sole proprietorship is the simplest form of business organization — so simple it seldom requires any forms or agreements. The sole proprietorship is the business organization of choice for most small businesses with few employees. A sole proprietor can, however, operate any kind of business from a hair salon to a home-remodeling business, or from a home-based business to a large, multilocation, multiemployee housing-rental business.
Formation of Sole Proprietorships
Simply beginning to do business forms a sole proprietorship. No government licenses are required unless the business is engaged in an activity regulated by the government, such as selling liquor. In most states, the most onerous requirement for forming a sole proprietorship is the necessity of filing a certificate of assumed name. This filing is necessary if the name of the business does not include the name of the proprietor.
Advantages of a Sole Proprietorship
The simplicity of the sole proprietorship is attractive to many beginning businesses. A lawyer who opens a law practice often begins as a sole proprietorship. The owner of a sole proprietorship is entitled to all the profits of the business. In addition, the owner is free to make any decision concerning the operation of the business, such as the nature of the business, the location of the business, and the type of business. This exclusive control gives the sole proprietor great flexibility in the operation of the business.
Sole proprietors often work from a home office. The paralegal should be alert to possible liability issues arising from this arrangement, such as when the client plans to receive customers or clients at a home office. Many home insurance policies exclude claims arising from the business activities of the insured. Injuries to business visitors may not be covered by such a policy. The client may need additional insurance for these activities.
Another advantage of a sole proprietorship has to do with the taxation of profits. Because the sole proprietor is an individual, the profits from the business are taxed at the individual rate of income, rather than at the corporate rate, which is often higher. In addition, the sole proprietor may deduct any losses suffered by the business from ordinary income from any source.
Disadvantages of Sole Proprietorships
One of the primary disadvantages of a sole proprietorship is that the owner of the business is personally responsible for the debts and obligations of the business. There is no distinction between the personal assets of the business owner and the assets of the business. If the business encounters financial difficulty, the creditors of the business may seize the personal property of the business owner to satisfy the debt.
This personal responsibility can pose impediments to the expansion of the sole proprietorship. Because all the assets of the sole proprietor are the assets of the business, it can be difficult for the sole proprietor to obtain financing. The sole proprietor is limited to loans, because a capital investor cannot acquire an interest in a sole proprietorship without changing the form of the business organization.
A sole proprietorship does not survive the death of the business owner, and if the business owner wishes to sell or transfer the ownership interest, a new business organization must be created.