What is a Sole-Proprietorship?

The biggest drawback to operating a business as a sole-proprietorship is the potential for personal liability.

by Rebecca Berlin

A sole-proprietorship is a business that is owned by one person or by a husband and wife. Unless the business is formed as a corporation or a limited liability company, it will be a sole-proprietorship by default. One of the biggest advantages of operating a business as a sole-proprietorship is that it does not require that the business owner comply with statutory requirements regarding decision-making. This differs from a corporation where state statutes require shareholder's meetings, the election of a board of directors and officers, and directors' meetings. For many small business owners, the statutory requirements of operating a business as a corporation are just too cumbersome. After all, they are far too busy running the business to have meetings for the purpose of granting themselves the authority to run the business.

The biggest drawback to operating a business as a sole-proprietorship is the potential for personal liability. Most business owners expect to be responsible for the debts of their business and have probably given personal guarantees for any business loans. But if the business were to be sued for any reason and have a judgment entered against it, the business owner would be responsible for that as well. The amount of liability could exceed the entire value of the business and cause extreme financial hardship to the owner. For many business owners, avoiding the potential for this kind of liability is well worth complying with the requirements for operating as a corporation.

A sole-proprietorship is also unique in how it is treated for federal income tax purposes. All of the profits of the business are taxed as income to the owner. This may not be the form of business that would result in lowest amount of taxes being paid by the business owner.

An attorney who practices business law can help you sort out the advantages and disadvantages for your particular business of operating as a sole-proprietorship. This includes helping to evaluate the risk of liability and the tax consequences of the business structure. If you do end up deciding to switch to operating your business as a corporation, your attorney can draft and file the necessary documents. Your attorney should also let you know what will be required in the way of record keeping for your shareholder's and directors' meetings.

 

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