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May 2, 2011 - 2 minute read - Comments - legal

Sole Proprietorship

There are basically three legal forms of business ownership; sole proprietorship, partnership, and corporation. In a sole proprietorship, you own the business and its assets directly. All business income would be reported and declared on your personal tax return. Because you are inseparable from your business, you have full liability for the obligations of your business. A lender could make a claim against your personal assets for business debts. There are a number advantages and disadvantages to this form of ownership: Advantages

  • Simplicity. You can get started after registering your business name and obtaining a business license.
  • Taxes. If you are running a business part-time while working full-time, you can write off any business losses against your employment income.
  • Decision making. Because you are the business, you make all the decisions and you can make them quickly.

Disadvantages

  • Liability. Default on business debts or lose a lawsuit and your personal assets like your house or car could be in jeopardy.
  • Taxes. If you are working a full time job while operating your business on the side, any profits will be added on top of your employment income and taxed at your full marginal rate. This leaves you with less money to invest back into the business.
  • Confusion. Sole proprietors often have trouble keeping their personal finances separated from their business finances. This makes it more difficult to tell how a business is performing. It also makes bookkeeping and accounting more difficult. Sole proprietors should always maintain separate personal and business bank accounts in an effort to avoid this.

There is no one right form of business ownership. It is dependant on your personal situation. You should talk to your accountant and lawyer before making a decision. Their fees will be a small price to pay to ensure that you have the legal form of ownership that’s right for you.