Starting a new business is all about flexibility. You have the option to set your own hours, be your own boss, and devote your time and energy to the work that you are truly passionate about every day. An additional area of flexibility is the choice of entity formation.
Most small businesses start out as a standard business referred to as a sole proprietorship. Some entrepreneurs may enjoy being sole proprietors and being in control of their business. You can choose to keep this entity formation.
However, a sole proprietorship is also considered to be an unincorporated entity. It is one of the few companies that does not offer liability protection. Limited liability protection is a key benefit in starting a registered business.
If you are wondering whether to remain a sole proprietorship or to start your own business, there are some of these factors to consider.
Sole proprietorships are fully responsible for the business
The owner of a sole proprietorship is the boss. There are no other partners or members associated with the business. As such, they can potentially make decisions as they see fit and run the company on their own terms.
However, there is a catch associated with being your own boss. A sole proprietorship is responsible for good and bad things. From a customer who was accidentally injured in your business and brings you a lawsuit, to struggling to pay off accumulated business debt, there are various liabilities that can negatively affect both the company and its owner.
Incorporating offers limited liability protection
Constantly taking into account the “what if?” in case of a precarious situation is often not ideal for entrepreneurs. Starting a business is hard work and it is important that you keep your peace of mind. Some sole proprietorships may find it a little more beneficial if they incorporated or incorporated a Limited Liability Company (LLC).
Incorporated corporations, including LLCs, provide limited liability to business owners. This creates a separation between professional and personal assets. Limited liability protects the owner’s personal assets, including homes and cars, in the event of an incident that may be considered liability for your business.
Even more advantages result from the inclusion
Aside from limited liability, starting a business offers even more much-needed benefits for business owners to run their businesses successfully. Some of these include, but are not limited to, the following:
This is often one of the most popular perks of starting or incorporating an LLC. Incorporated businesses can be taxed as a pass-through business start-up. If you are not already in that formation, you can choose a pass-through entity like an S Corporation. Sole proprietorships, on the other hand, are also responsible for reporting all income on their tax returns. You must pay personal and business taxes, which can often result in an expensive tax burden.
Incorporated companies such as LLCs can be run by multiple members. You can decide whether you want to be organized as a Member Manager LLC or a Manager Managed LLC and draw up an operating agreement detailing the roles and responsibilities of each member. This type of agreement cannot be framed as a sole proprietorship, generally running the business on his own terms.
Formation of a specialized unit formation
Entrepreneurs in specialized professions, including lawyers and doctors, can set up a professional association (PC) or a limited liability company (PLLC). Entrepreneurs who form this business formation may have the ability to limit personal liability for claims related to errors or misconduct by a partner. A sole proprietorship in a licensed profession, such as an accountant or architect, may consider this type of inclusion for their business.
Should I be or stay a sole proprietorship?
Now that you have understood exactly what sole proprietorships are responsible for and the benefits of starting up, it is time to make a decision for your small business.
However, we cannot personally tell you which option is best for your business. Every company has different, unique needs. Contact an attorney for additional information and answer any questions you may have about the process of incorporating as a different entity or remaining as a sole proprietorship.