Perhaps the most common entity is the sole proprietorship. The reason it is the most common is because many people do not realize they have even formed this entity! A sole proprietorship may be the easiest to form and the easiest to dissolve, however, it is very important to recognize the legal implications of operating as a sole proprietor and to legally change your business entity if you desire more protection for yourself and your business.
A sole proprietorship is a business owned by a single owner. This is the one type of business entity where the law does not draw much of a distinction between you, the individual, and your business. There is no formal creation required, and any individual who begins doing business in their own name is a sole proprietor. For example, a lemonade stand on the street corner is operating as a sole proprietorship! Seems simple and easy right? There’s a catch. When running a business as a sole proprietor you are personally liable for the business’ debts. This means if your business happens to have the misfortune to be sued or if you have creditors, they are able to come after not only your business, but you personally! By taking the time (it isn’t much time) to form your business as a different entity type you can avoid this personal liability and potentially avoid trouble down the road.
So, imagine that you have decided that you want to transfer your business to someone else. As a sole proprietor, you can transfer your business BUT when it is transferred it becomes an entirely new sole proprietorship for the new owner, even if it has the same name. Additionally, there is no perpetual duration, meaning if the owner stops running the business there is no more business. This can be good or bad, depending on the situation. Fortunately, dissolving the business is quite simple. You close your bank accounts, pay your creditors, collect money, inform your clients, sell everything off, and file some tax forms and that’s it!
If you want to be sure that you have limited liability and that you will not be considered a sole proprietor, you’ll need to take steps to create a business entity that is separate and distinct to provide you with a greater degree of protection. For some, partnerships may be the answer. Our next sections will tell you more about the other entity types and help you to discover which one is right for you and your business.
© 2016 John V. Robinson, P.C.