Your Guide to Business Entity Types: Sole Proprietorship
Welcome to our blog series, Your Guide to Business Entity Types. Today, the team at Morris Law Group will be discussing sole proprietorships. This business type is extremely common, as it doesn’t require any additional paperwork to file with the state such as a corporation or LLC does. Many small businesses that are operated and owned by one person are sole proprietorships.
Continue reading to learn more about sole proprietorships, and if you are in need of legal counsel, advice, or representation from an experienced business attorney, reach out to Morris Law Group today.
What Is a Sole Proprietorship?
A sole proprietorship is a business entity wholly owned and operated by one individual. There is no need to file any paperwork with the Secretary of State in the state in which it operates, unless the owner wishes to change the form of his/her business. This type of business organization has its benefits and pitfalls for the purposes of management, liability, and taxation.
Because of this type of organization, there is no distinction between the business and the individual owner/operator. Thus, all assets owned by the business are owned by the individual owner/operator. Additionally, the business name and address is often the same as the individual and his/her home address.
Management Structure
A sole proprietorship, as the name suggests, has one individual owner with total authority over the management and obligations of the business. Because there is only the individual owner/operator, a sole proprietorship has no need for articles of incorporation, bylaws, or a partnership agreement to guide the management of the business. The benefit of this type of business organization is that you are quite literally your own boss, you make your own rules, nobody can tell you how to run your business.
Liability
A serious pitfall of this type of business is that it leaves the owner/operator subject to personal liability for all business conducted. The owner/operator, because there is no separation or distinction between the business and individual owner/operator, is personally liable for all debts and obligations of the business. This includes any acts of misconduct or negligence on behalf of the owner/operator. Therefore, any legal action taken against the business is also taken against the individual owner/operator, subjecting the individual’s personal assets, i.e. home, car, boat, savings account, etc. to repossession or forced sale to satisfy the business’s debts and obligations.
Taxes
Finally, for the purpose of taxation, a sole proprietor is personally entitled to any income generated by the business. The sole proprietor must report any income or losses incurred by the business on his/her personal federal income tax return.
Learn More About Sole Proprietorships
Are you interested in starting your own business? Do you already own a sole proprietorship and are in need of legal counsel or representation? Morris Law Group can help. Reach out to Minnesota business attorneys today to schedule a consultation to get started. Serving the Minneapolis, Saint Paul and Western Wisconsin, Twin Cities Minnesota metro area.