Organizing Your Business Part 1: Sole Proprietorships
There are several ways to organize a business, and the option selected depends on various factors. A small, family-owned and -operated business will likely choose a different structure than a larger company with several owners and many employees.
Each option has benefits and drawbacks. The option selected by a business may change over time as the business’s needs, identity, size, budget, and liabilities change. A person may start out as a sole proprietor but decide to incorporate years later after growing their business and hiring a staff.
But with so many business types out there, how do you choose? Should you set yourself up as a sole proprietor? Should you incorporate, and, if so, do you do so as an LLC, an S Corp, or a C Corp?
We’ll try to sort through some of the confusion with these next few posts. First, we’ll look at Sole Proprietorships and Partnerships. These have a few commonalities, including the important fact that debts and liabilities are tied to the individuals (either the sole proprietor or the partners).
Another commonality is that to operate as a business, you will need to secure a Federal Tax Identification Number and you will also need to register your business name. Depending on your state, the business name registration may be known as a DBA (Doing Business As), Fictitious Business Name or FBN, Assumed Business Name or ABN, or a Trade Name.
Sole Proprietorship DBA
A sole proprietorship is the simplest form of business organization.
Sole Proprietorship: Pros
One person owns, manages, and controls the business. A sole proprietorship may have employees, but only the owner is in charge of the business. The owner receives the business profits and losses. This person is also responsible for any debts the business may incur. Income, expenses, and losses are reported on the business owner’s individual tax return, and business profits are taxed at the individual taxpayer rate.
Sole Proprietorship: Cons
The drawbacks to sole proprietorship include being personally liable for debts and liabilities of the business; there is no corporate veil with a single-owner DBA. For example, if a business has debts that are not being paid, the creditors can reach the personal assets of the business owner, such as a personal checking account. A business owner may obtain insurance to minimize this drawback.
Other drawbacks include lack of continuity—when the business owner dies, the business ceases to exist—and generally not being able to deduct benefits like health, dental, and life insurance on a sole proprietor’s income tax return as business expenses.
Who should organize as a Sole Proprietorship?
A sole proprietor business is a great choice for independent consultants with fixed costs or small side businesses. If you don’t foresee your business having much financial liability tied up in things such as inventory and leases, consider a sole proprietorship.
[This has been Part 1 of our 4-part Organizing Your Business series. For our next installment, please see “Organizing Your Business Part 2: Partnerships.”]