When you begin operating a business or earn income from a source other than a traditional employer, it is important to understand the new obligations you have as a result of your entrepreneurial efforts. In some cases, you will need to become licensed by the state and obtain an employer identification number or tax ID number for your business. You also need to make decisions on the best way to organize your business enterprise.
One of the simplest ways to operate a business is as a sole proprietor. If you are earning non-wage income and have not formally taken steps to choose a business structure, chances are you are operating as a sole proprietor. This can cause you to incur personal liability for the acts of your business and, in some cases, you may be better off choosing an alternative type of business organization. To learn more about what sole proprietorship is and whether it is the right choice for you, it is advisable to talk to an attorney.
What is a Sole Proprietorship?
A sole proprietorship is simply a business entity owned and run by one legal owner. The owner of the business and the business are considered the same legal entity. This means that:
- The sole proprietor declares income and losses from the business on his personal income tax returns.
- The owner of the sole proprietorship is personally responsible for all of the debts that the business incurs.
- The sole proprietor is personally liable for any lawsuits brought against the business for any reason.
- The business owner is personally responsible for entering into contracts and complying with regulatory rules and can be held liable for a breach or failure to fulfill legal obligations.
A sole proprietorship does not have to be created, like a corporation does. You don’t have to register your company with the state, get a separate taxpayer ID number for your business, or file a separate income tax return. As soon as you earn non-wage income and receive a 1099 tax form for goods you sell or services you provide, technically you are operating a sole proprietorship.
Some large businesses can operate as sole proprietorships, often for many years. However, if the business goes bad or gets into debt, you cannot declare business bankruptcy as a sole proprietorship. Since you and your business are the same legal entity, you would need to declare personal bankruptcy and all of your assets could be affected.
Sole proprietorships can be difficult or impossible to sell, since they often rely so much on the skills and knowledge of the business owner for their brand and their success. These types of businesses also frequently die with the owner of the company.
Because of the myriad disadvantages and risks of sole proprietorship, you may wish to consider alternative business structures. An experienced San Jose business law attorney at the Law Offices of Mike Ross can help you to determine your options for structuring your business organization and can help you to form a corporation or limited liability company if you wish for more protection for your personal assets.