The Sole Proprietorship
You’ve decided to follow your dreams and start your own business. You know what you want to do–you’ve known it for years. You know that now is the time. What you don’t know: what form should your business take? Should your business be a Sole Proprietorship, an S-Corporation, a Limited Liability Corporation, or none of the above? The entity you choose could impact the management of the business, the way your business is taxed, even the liability you and other owners may be faced with if your business is sued. Therefore, when it comes to choosing what form your business will take, you’ll want to choose carefully.
To help with your decision, in a three-part series, we will describe some of the entities you can choose from; some of the requirements for formation; certain tax[1] and liability consequences; and some general pros and cons of each form. Let’s start with the pros and cons of a Sole Proprietorship.
Going Solo?
If you want your business to be your business, a sole proprietorship (which is generally a business owned by an individual) may be your best option. The pros of a sole proprietorship:
- They are the least expensive type of business to form.
- There are few requirements other than filing an assumed business name certificate, registering for applicable business taxes with the Illinois Department of Revenue, and registering with applicable state and federal agencies if you plan to have employees.
- Once off the ground, they are subject to far less scrutiny from state and federal agencies than an incorporated business structure (“Look Ma, no financial statements or annual reports!”)
- You, the owner, have control over every aspect of the business—it’s your way or the highway.
- Because you have control over every aspect of the business, you can adapt quickly to a changing business environment. You call the shots, and you can call them immediately.
Do you have to keep your business funds separate from your personal funds when you’re a sole proprietor? No. The sole proprietor can take money from his/her business to meet his/her personal obligations or, on the other hand, use his/her personal income to pay business debts. And, accordingly, sole proprietorships are not taxed as separate entities. The sole proprietor simply reports all of his/her business income and losses on his/her personal tax return.
However, despite its advantages, the sole proprietorship has a few distinct disadvantages:
- Because a sole proprietorship and its owner are legally indistinguishable, a sole proprietor has unlimited liability for debts, losses, liabilities and obligations that arise while operating the company. You, the owner, are “on the hook.”
- Raising capital may be difficult. A sole proprietorship cannot issue stock to raise money, so equity investments by third parties can become problematic. And sole proprietorships may have more difficulty securing business loans than other entities, because lenders may fear the inability to recover if a sole proprietor dies or becomes disabled.
Thus, sole proprietorships have the benefit of a relatively easy, inexpensive set-up and can be relatively low-maintenance, but also require full liability of the owner, and it may be harder for them to secure outside capital. But there are several other options for forming your business. In Part II, we will compare the different types of partnerships and in Part III we will compare types of corporations.
[1] The tax information provided herein is general in nature and not intended to be a substitute for advice from a provider of your choice with regard to your own personal tax situation.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
If you need assistance with a related matter, contact us.
