A “Sole Proprietorship” is a business owned by an individual that has not been registered as a partnership, limited liability company (LLC), corporation, or any other kind of legal tax entity. This is the simplest form to conduct business. The sole proprietorship is not a legal tax entity. For tax purposes, the sole proprietor (the owner) and the business are indistinguishable, and the business profits are reported and taxed on the owner’s personal tax returns.
One of the major drawbacks of sole proprietorships, and one of the main reasons people decide instead to form limited liability entities such as LLCs and corporations, is that the owner of a sole proprietorship risks unlimited personal liability for business debts and losses. For example, if the business becomes liable for a debt, the creditor can pursue the owner’s personal assets for payment. If the owner is married, this personal liability encompasses property and assets held as community property in the marriage.
An advantage of doing business as a sole proprietorship is that, other than any applicable licensing requirements, sole proprietors do not have to comply with any of the formalities that apply to legal tax entities such as a limited liability company (LLC) or corporation. However, given the potential for unlimited personal liability of a sole proprietorship, someone with significant assets should consider running their business as some form of limited liability entity such as an LLC, Corporation, Limited Liability Partnership (LLP), or Limited Partnership (LP).
Please feel free to download our COMPLIMENTARY Side-By-Side Comparison Chart of the advantages and disadvantages of California LLCs, corporations, s-corporations, and sole proprietorships HERE. If you would like to read a more in-depth report about the different business entity forms, please click HERE.
And do not hesitate to contact us if you need help forming a limited liability business entity or have any other business concern. The Tagre Law Office offers Modesto Business Attorney services for your company in California.