When forming a new business, it is important to determine which business structure is appropriate. You should consider the number of owners, and also your potential personal liability for the business. While a sole proprietorship is one of the easiest structure to form and operate, it is not appropriate for every business. If you want to have more than one owner, a partnership may be more appropriate.
Fit your business needs with the right LLC package
Sole Proprietorship Basics
Every state recognizes sole proprietorships as a business entity. In many states, a sole proprietorship does not require registration with the state, but is automatically formed one an individual does any business. In this type of business, a single person owns the business. Essentially, the business operates as an alter ego of the owner. Unless the owner files for a fictitious business name, the business is operated under the owner's name. Further, the owner remains personally liable for the debts of the business. At the same time, the business is usually not responsible for business tax. Instead, all of the income and losses are reported on the owner's tax return of the owner.
Limitations on Sole Proprietor Ownership
A sole proprietorship is not an independent entity, but is instead the owner's alter ego. This means that when the owner dies, so does the business, which is not the case for corporations or other independent entities. The owner of a sole proprietorship is solely and personally responsible for the business. As a result, the business cannot, by definition, have more than one owner. The business is called a "sole" proprietorship because it is the business activity of an individual.
When two or more people want to form a business together in a similar fashion to a sole proprietorship, they will form a partnership. Like a sole proprietorship, a general partnership often does not require registration with the state. Instead, the partnership is automatically formed when two people start doing business together. When a partnership wants to do business under a different name than the owners' names, it is also required to file for a fictitious business name with the state.
Partnerships Vs. Sole Proprietorships
Partnerships have a lot of the same advantages and disadvantages as sole proprietorships, but there are some differences. A partnership is relatively easy to form and usually does not have to pay business income tax. Unless the partnership is registered as a limited liability partnership, the partners will remain personally liable for the business's debts. However, the partners in a partnership have the additional burden of determining how the contributions, work and profits will be divided among the owners. As such, there may be additional conflict and disagreement in a partnership that a sole proprietor does not face.
References & Resources
- Jupiterimages/BananaStock/Getty Images