A sole proprietorship is a business owned by one person or a married couple. Because it’s just one person, this is the simplest (and often least expensive) type of business to form, even less than an LLC.
But don’t form that proprietorship just yet – it’s important to understand the downsides of this type of business.
Key Facts About Sole Proprietorship
Perhaps the most important characteristic of a sole proprietorship is the fact that there is no legal separation between the business and the business owner, meaning the owner is personally responsible for any debt that the business incurs.
If you run a sole proprietorship and your business account is delinquent, a creditor can enforce a judgment against assets you’ve designated for the business, like your office space or company vehicle.
Unfortunately, debt enforcement doesn’t end there. The creditor could even come for your personal assets, including your home and family bank accounts.
Also, sole proprietorship usually operates under the business owner’s Social Security number. That means any delinquent business debt will show up on your personal credit report.
For all of these reasons, unless your business is guaranteed to be successful, sole proprietorship probably isn’t your best option if you have a family.
LLC vs. Sole Proprietorship
In contrast to sole proprietorship, an LLC is a legally separate business entity, meaning individual members have some protection from debt and other business obligations. Therefore, a lawsuit or creditor cannot threaten the owner’s personal assets.
LLCs combine certain elements of a sole proprietorship, partnership, and corporation, giving more flexibility to members and letting them decide their tax treatment, management structure, and other business necessities.
An LLC doesn’t even have to have more than one person. If you’re a one-person show, you can form a single-member LLC and enjoy the benefits of this flexible business formation type.
However, like any other business type, LLCs have some downsides. For instance, LLCs typically cost more to form and maintain than a sole proprietorship. Ongoing state fees such as annual reports and taxes can be particularly steep, especially for a new business.
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Forming a Sole Proprietorship
You may already have a sole proprietorship and not even know it.
Technically, one person with goods and/or services for sale is a sole proprietor. That means you could sell hot dogs out of your car and have a sole proprietorship.
The State of Maryland makes no distinction between the sole proprietorship and its owner. That means owners don’t have to formally register their business with the state, as long as the owner includes their legal name in the name of their business.
For example, if attorney Fred Coover opened up a doughnut shop with himself as sole proprietor and named it “Coover’s Doughnuts,” he wouldn’t need to register it with the state.
A business name that doesn’t include the proprietor’s legal name is known as a “fictitious name” and must be registered as a fictitious business name (FBN) or DBA (“Doing Business As”). In the doughnut example above, Mr. Coover would need to register his business if he decided to name the company “F.C. Doughnuts,” since it doesn’t include his legal first or last name.
In Maryland, most people use the term DBA to refer to this type of filing. “DBA” as in, “Fred Coover, doing business as F.C. Doughnuts.”
If you’re at the point of choosing a business name, it’s a good idea to go ahead and visit Maryland’s Business Express website. Here you can get familiar with required business documents and tax statements, among other things.
Coover Law Firm Is Here for All Your Sole Proprietor Needs
The structure that you choose for your business will affect your taxes, your extent of liability, how you can transfer ownership, and much more.
Attorney Fred Coover of Coover Law Firm, LLC is a Howard County business and corporate lawyer who advises clients on all aspects of business entity formation and maintenance. He’ll help you meet your business goals and work to resolve any issues that may arise.
Call (410) 553-5042 now.