A sole proprietorship, meaning a business owned by one person, is the most common type of business structure. In Washington, a married couple operating a business together can be considered a sole proprietorship as well.
I often hear business owners say, “I’m just a sole proprietor” – as if that was something to be ashamed of. It’s not. A sole proprietorship is an appropriate form of business ownership for many businesses. It’s simple to form (even I will admit, you do not need an attorney to form a sole proprietorship!). It’s simple to maintain. A business owner has tremendous flexibility in how the business is managed, with fewer legal requirements. It also can be a terrific business model for a home-based business, because you can take advantage of the home office deduction on your federal income taxes and you don’t need to worry about developing a rental agreement between you as landlord and the corporation/LLC that you own.
Two main disadvantages exist to running your business as a sole proprietorship. First, it may not be the most advantageous from a tax perspective. You should check with your certified public accountant so you understand the numbers and nuances around this concept. Second, you are personally liable for all debts and tort liabilities related to your business. Need a bank loan for your business? You’ll be personally liable for that. You were served with a summons and complaint related to a mistake on your customer’s work? You’ll be personally liable for that, too. So you need to carefully examine the potential risks faced by your business and also take a close look at your insurance coverage. Is your risk level as a sole proprietor manageable or scary? If it’s scary, it’s time to take a look at forming an LLC or a corporation for your business.
So be proud of your sole proprietorship! And be smart about it. If you’ve carefully evaluated the tax issues and your business risks, and you believe a sole proprietorship is the best entity for you – then keep it! Be sure to get good accounting advice along the way, keep your business and personal finances pristinely separate, and get good legal advice regarding contracts and other areas of concern for your business.
Photo credit: David Martyn Hunt on Flickr