I think, therefore I am - the Sole Proprietorship
The sole proprietorship is a business that is legally the same as it’s owner. That’s how Fred formed a sole proprietorship merely by thinking “I’m starting a business.” Throughout this section of Business Basics, we’re talking about forming a business, not opening your doors and doing business. That’s going to involve a little bit more detail; like a name, and a business license. But to create a sole proprietorship, you just think it into being.
Because there’s no separateness between Fred and his business, Fred’s business is taxed as part of Fred’s regular tax return. Sure it has it’s own schedule (Schedule C), but the bottom line on Fred’s business’ schedule gets plopped right onto Fred’s personal tax return. So everything the business makes, Fred pays taxes on.
Also, since Fred and his business are legally one entity – Fred is personally liable for all of his business’ debts. Sounds scary, right? In fact it sounds so scary some people don’t really think through what it means. It means that everything Fred owns – his house, his stamp collection, his bank accounts, his fully restored 1956 Harley Davidson – could all be taken away if someone successfully sued Fred’s business. But wait…
Before you run away, let’s look at what Fred’s actually going to do. If Fred’s consulting consists of designing birthday cards – what is the likelihood that he’s going to incur some huge debt in his business? On the other hand, if Fred’s company is going to be writing software that automatically figures out the doses of medicine to give to patients in an Emergency Room, well then if I were Fred, I’d be afraid of the sole proprietorship (although even a corporation might not help save the Harley if Fred is doing all of the programming himself, but more about that later).
Oh, and if Fred hires lots of employees and moves into swanky offices – his business is still a sole proprietorship as long as he’s the sole owner and he hasn’t filed with the state to create one of the more complex, state-created entities.
So – sole proprietorships: quick, easy and cheap to create – you just think them into existence; you and the business are legally one entity so you share taxes and liability. If you want to know more about sole proprietorships, give me a call (408-955-9100).
