What You Need to Know About Being a Sole Proprietor
You are legally entitled to run a business and make money (or suffer losses) as an individual. This is simply known as a sole proprietorship. You can make products and sell them or offer personal services for a price without forming a separate legal entity like a corporation or limited liability company (LLC). There are few limitations though. Certain personal services require a professional license, like being a doctor or lawyer, and have insurance requirements. In these circumstances, being a sole proprietor may not be the safest or smartest option for your enterprise. For more information on being a sole proprietor, call the experienced business formation attorneys at the Law Offices of Larry E. Bray.
You do Not Have to Form a Sole Proprietorship
Unlike corporations, LLCs, and some partnerships, you do not have to take any formal action to create a sole proprietorship. You can simply start offering your products or services for sale. If you want to use a business name other than your own name then you may need to file paperwork to use a fictitious name. This does not create a business entity, it simply registers your business name.
However, you may need licenses and permits. Be careful not to start making sales until you have complied with all relevant state and federal laws regarding the services or products you offer.
There Are No Separate Taxes
As a sole proprietor, the business’s profits and losses are your own. If you make a profit during the year, you will record this income on your personal taxes. You will be responsible for income, self-employment, Social Security, and Medicare taxes and withholdings. If you are working as a sole proprietor, you should speak with an accountant. You may need to pay quarterly estimated taxes or suffer a penalty at the end of the year.
The benefits of this tax system are that it is simple, cost effective, and you retain entire control over your business. However, you can also get hit hard with a tax liability each year. If you start making a significant amount of money, you may want to look into forming a legal entity to separate the business and your personal tax liabilities.
You Are Liable to Creditors
One of the major downsides of operating as a sole proprietor is that you are liable for any debts you take on for the business. This means creditors may come after your personal assets if you default on the loan. If you take out a significant business loan in your name and are unable to pay it back from the business’s profits, it could wipe out your personal savings.
You Are Liable for Legal Claims
It may not have crossed your mind, but what if someone gets hurt using your product or from the services you provide? Even if you have insurance, you could be subject to a lawsuit based on property damage or personal injuries. Without a separate legal entity, the lawsuit will be against you, not a business. You will have to pay the court costs and attorney’s fees to defend yourself. If you lose the suit, the jury award could be more than your income or savings.
Contact a West Palm Beach Business Formation Attorney
There are pros and cons to every business type, including sole proprietorship. This way of doing business works well for young businesses that have little to worry about in the way of debt or personal liability. However, if you provide personal services where clients could be dissatisfied or you want to take out a loan to expand, it may be best to look into other types of entities. For more information, call the Law Offices of Larry E. Bray at 561-571-8970 in West Palm Beach and schedule an initial consultation.