The least expensive and perhaps the easiest way to start operations as a business is to become a sole proprietorship. No documents or forms are necessary, although in some jurisdictions a business cannot operate unless the owner gets the proper types of licenses. Legally, a sole proprietorship is not considered a separate entity from the owner. This type of business organization simply means that there is only one business owner who does business in his or her own name.
Doing Business As…
There are cases when a sole proprietorship will operate under a name that is something other than the owner’s name. In these cases most localities require certain legal documentation called the fictitious owner affidavit, which informs the local government as well as the public that a specific owner so named in the document operates a business under an assumed name. Different localities have different requirements, so check with your local courthouse in the count seat and ask for the county clerk. If there is any question about compliance with state or local laws, especially with interstate business, consult your attorney.
Liability Issues
The business owner is personally liable for all debts associated with the business. Creditors can go after the sole proprietor’s personal assets if business assets cannot cover business debts. The reverse is also true, if your personal assets are not sufficient to cover personal debts, your creditors can go after business assets. As the business owner you should carefully consider potential lawsuits that could be brought against you, such as issues associated with the product you sell or the service you perform and injury of customers. There are several different types of business insurance that can set your mind at ease, including product liability, malpractice, or general liability.
Tax Considerations
The taxation process of a sole proprietorship is relatively direct; everything, from income to loss, is reported on the owner’s individual income tax return. The owner may also be subject to self-employment taxes, and if you plan on hiring employees you can not use your social security number as the identifying number for your business; you must apply for a Federal Employer Identification Number (FEIN) and pay payroll taxes. To obtain a FEIN, file form SS-4, Application for Employer Identification Number.
Advantages
There are quite a few advantages to establishing a sole proprietorship for the smaller scale business. The owner has complete control, and the business is easy to start. As long as there is not a high liability risk, the business is easy and lower cost to operate. Start up costs and organizational fees are minimal because of the fact that fewer legal documents and less attorney involvement is necessary. In terms of taxes, the owner is not doubly taxed because the business is not treated as a separate, taxable entity by the IRS.
Disadvantages
The disadvantages are fewer but the implications are relatively grave. The owner is personally liable for all the obligations of the business, as discusses previously. Also, a sole proprietorship is limited to ownership by a single individual. No other people can be involved in the ownership of the business, so if you decide to bring in anyone else, the sole proprietorship must be dissolved.
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