Sole Proprietorship
What is a Sole Proprietorship?
A sole proprietorship is a business owned by one person. It has no legal distinction from the owner, and usually requires no governmental filing other than a fictitious business name statement (“DBA”) if the owner is doing business in any name other than a personal name. A sole proprietorship is probably the most common form of business because it is simple to start and avoids the operating expenses required for other legal entities such as corporations and limited liability companies.
No Personal Liability Protection
Because there is no legal distinction between the owner and the business, a sole proprietor is personally liable for all the debts and obligations of the business. It also means that on the death of the owner, the business enterprise terminates, leaving only the assets of the business such as equipment, accounts receivable, and real property. Because the assets used in the business are not separated from the other assets of the business owner, it may be difficult to sell the business as a whole after the death of the sole proprietor.
No Double Taxation Concern
For tax purposes, there is no distinction between the sole proprietor and the business. All income and expenses of the business are reported on the sole proprietor’s personal tax return. This means that the net income from the business is taxed only once.
Corporation Types: C Corporation, S Corporation, Nonprofit and More
A corporation is a separate entity from its owners for both legal and tax purposes. Corporations are formed by filing Articles of Incorporation with the Secretary of State. A corporation is comprised of three groups of people: shareholders, directors, and officers. The shareholders elect the board of directors who are responsible for setting major goals of the corporation and making major decisions. The board of directors appoints the officers, who run the business on a day-to-day basis.
Separate Entity Means Personal Liability Protection
Since a corporation is a separate legal entity, the corporation generally is responsible for the debts and obligations of the business. In most cases, shareholders are insulated from claims against the corporation.