Sole Proprietorships
Posted on 17. Dec, 2008 by Terry in Income Taxes
The largest majority of small businesses start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibilities for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They are also responsible for all of its liabilities and debts. In the eyes of the law and the public, you are the business. Let me give you a good example. I have a client who has several employees who drive vehicles for him over long distances on a daily basis. If one of his employees had an accident resulting in the death or disability of one or more people, or extensive property damage, the insurance may not cover all the claims.
Guess who will legally responsible for all the lawsuits and claims against the business. The claims could be filed against everything he owns. It could be financially devasting. I advised him to incorporate, which would limit his liability for judgements against the corporation. He is now a happy client.
Some of the advantages of a Sole Proprietorship are:
Very easy and least expensive form of business to organize.
Sole proprietors are in complete control.
They receive all income generated by the business to keep or reinvest.
Profits from the business flow directly to the owner’s personal tax return. The business portion of the tax return is filed on a Schedule C on he return.
The business is easy to dissolve, if desired.
Disadvantages of a Sole Proprietorship:
Sole Proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk, as in the example I gave you.
They may be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
They may have a hard time attracting high-caliber employees or those that are motivated by the opportunity to own a part of the business.
Some employee benefits such as owner’s medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).
In my next post I’ll give you the details on the Partnership form of ownership.
