Builders and Contractors Exchange
Weekly Bulletin: 04 Jun 2004
What Type Of Entity Is Right For Your Business? Part 1 of 4:
The Sole Proprietorship
By: Richard J. Crouch
You may have noticed that people conduct business in a wide range of entities, but why do they do so and what are the important issues to consider when choosing an entity for your business?
The factors you should always consider before forming an entity are as follows: (i) limiting your exposure to liability and risk, (ii) minimizing taxation, and (iii) maintaining flexibility in management, ownership structure and compensation. When you are just starting out, this part of the process may not seem important, but being organized from the beginning can save you a lot of complications and money down the road. This article is the first installment in a series of four articles that explore and compare the benefits and disadvantages of sole proprietorships, the different forms of partnerships, the different forms of corporations, and limited liability companies. The first entity we will look at is the Sole Proprietorships.
Formation and Flexibility: This is how many people do business, which does not require any formal filing with the State Corporation Commission ("SCC"). The business is owned and managed by one person who receives all of the profits and bears all the losses. This form of entity is the most simple business entity and has the least administrative burden.
Personal Risk and Liability: Although flexible, one major downside of this approach is that you have unlimited personal liability for any lawsuits or damages that arise from accidents, unpaid bills, or other problems affecting your business. In other words, the winner of a lawsuit against a sole proprietor can not only collect money from the business but can also ask a court to force the owner to sell personal property, such as the owner's house, car, etc. The substantial exposure of the owner to personal liability is the primary reason why these entities are not favored.
Taxation: From a tax standpoint, your business will file a Schedule C to be attached to your individual 1040 tax return. In addition, you also have to pay self-employment tax of approximately fifteen percent (15%).
Choosing the right entity will, of course, depend on a number of factors, including, but not limited to, the nature of your business, your long-term goals, and the company's finances. For those entities that require formal filings, some individuals choose to form the companies themselves, but you are better off getting a lawyer to do it. If you were to file incorrectly, you could find yourself in a bind at tax time. It is always a good idea to consult an attorney experienced in these matters, and the more specific your business plan and your preparation, the easier it will be for your lawyer to help you form the entity that is right for your business.
Part 2 of 4 in this series will discuss the benefits and advantages of the different types of partnerships.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.