Understanding Legal Business Structure—Part One—Sole Proprietorship

It dawned on me when I was writing about coming up with a written company description for a home business, that we haven’t really talked about all the different types of business structure possibilities there are. Even for a small home business, you might want to spend some time evaluating what sort of legal structure is best for your situation. Many of us choose to organize our businesses as a sole proprietorship because there is only one of us and it can seem the easiest way to go about things…

Being a sole proprietorship means that you are the business and the business is you—the liabilities and assets of the business are your own. This can have its advantages and disadvantages, of course. Since the business is not a separate entity, any debts that are incurred you will be personally responsible for and you can be personally sued for something that happens with the business and your personal assets can be affected.

Additionally, since there is not a company with shares of stock, the ownership is completely that of you, the business owner or sole proprietor. It can be tougher for a sole proprietorship to raise capital and get loans since there is only one person operating the business and responsible for everything. The advantages of a sole proprietorship is that you do not have to share the profits and it can be easy to close the business if you want or need to since the business does not have a life outside of you. Many people start out their business structure with a sole proprietorship and then, as the business grows, they may take on a partner or grow into a corporation or some other type of legal entity. Remember a sole proprietorship is unincorporated and considered the simplest type of business to form. This doesn’t mean that you shouldn’t get financial advice and legal information prior to setting up your business, however!

Also: Ten Steps to Starting a Home Business Part 2