Can a Sole Proprietorship Be Incorported?

by Cindy Hill
Incorporating a sole proprietorship provides liability protection, but can be costly.

Incorporating a sole proprietorship provides liability protection, but can be costly.

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Sole proprietorships are the most common form of business, with over 22 million Americans operating sole proprietorships, according to the U.S. Census Bureau. A sole proprietor can choose to incorporate her business, which has the advantage of increased protection from liability, but can increase costs in terms of taxes and paperwork filing requirements. Consult a tax professional or attorney to determine whether incorporating is an effective choice for any particular sole proprietorship.

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Similarities

Both a sole proprietorship and a corporation can hire employees, enter contracts, and do business under a trade name. A single business owner has extensive control over the operation of her business, whether it is in the form of a sole proprietorship or a single-owner corporation. Either form of business can be sold, borrow money, acquire insurance, and register copyrights, patents and trademarks on business materials or inventions. The similarities between sole proprietorships and corporations come to an end at business filings, taxation and liability; in these areas, the these two forms of business structure are quite different.

Start-Up Filings

A sole proprietorship is a business owned by a single individual or a married couple that has no separate legal structure. A sole proprietor usually must file only minimal, relatively simple paperwork to start up a business, including complying with any zoning or licensing requirements, registering a trade name, acquiring a federal Employee Identification Number and in some states, a state tax identification number. A corporation is legally a separate entity from its shareholder owners. The corporate founder must file articles of incorporation with a state corporations office, and register with the Internal Revenue Services. Corporations must usually file annual reports with the state corporations office in addition to all required tax filings.

Taxation

A corporation is a separate legal entity that must file its own corporate tax return to state and federal tax agencies. Depending on the nature and financial operations of the business, a sole owner of a small corporation may wind up paying more taxes than a sole proprietor pays. These taxes include corporate minimum tax or corporate income tax at the business level, then personal income tax at the personal level. For some sole proprietors, however, the financial benefits of having assets like vehicles or machinery owned by the corporation may offset the additional tax burden of a corporation and make incorporation the more economically efficient choice of business entity. Always consult a qualified tax professional when choosing a business structure to help avoid unintended negative tax consequences.

Liability

Sole proprietors are personally liable for their business debts, including damages for breach of contract or judgments not covered by insurance. Creditors may attach a sole proprietor's personal property, including bank accounts and real estate, to satisfy debts owed by the business. A sole proprietor who is incorporating her business may transfer assets like an office or store, machinery or vehicles, to corporate ownership at the time the corporation is formed, or the corporation may acquire assets through the course of its existence. In most circumstances, only corporate assets can be used to pay corporate debts or judgments, helping to insulate the business owner's personal assets from liability. This protection is the primary reason many sole proprietors incorporate, but insurance or alternative business forms like a limited liability company may also protect against liability but have lower costs than a corporation.