Business Lawyer in Texas

Business Organizations Center - Texas Sole Proprietorship

As the name suggests, a sole proprietorship is an unincorporated business that has a single owner. It is the easiest type of business to form because, unlike corporations and LLCs, no paperwork has to be filed with the government to create the entity. The drawbacks are that the owner must report the business's income or loss on his or her own federal income tax returns, and the owner is personally liable for the business's debts and other legal liabilities. Similarly, the assets of the business can be seized to satisfy the owner's personal liabilities. LLCs and corporations offer more protection against liability, both for the business and for the owner.

In many sole proprietorships, the owner both manages the business and performs all of the business's labor, but some sole proprietorships also have other employees. A husband and wife can own a sole proprietorship together in some cases, although this situation comes close to actually being a partnership. Consultation with an attorney is invaluable to avoid any misunderstandings and unexpected consequences of operating a family business.

Most commonly, sole proprietorship owners operate their businesses under their own names. Those that do not are often required by local governments to file "fictitious name" certificates. Additionally, states generally prohibit unincorporated businesses from using any corporate designations in their names, such as Inc. or Corp.

As sole proprietorships become successful, owners typically decide to reorganize the business as another type of entity, such as an LLC or a corporation. This conversion allows owners to take advantage of the benefits of other types of business organizations, such as limited personal liability and certain tax breaks.

Pros:

• Simple to form and manage.
• Minimal government regulation.
• Business losses are deductible on personal tax returns.
• No "double taxation."

Cons:

• Owners are personally liable for business liabilities.
• Cannot have more than one owner.
• Business ceases to exist if owner dies.

Summary

While operating as a sole proprietorship is a simple way to begin running a business, this type of organization carries significant risks. Current and potential business owners should consult with a business lawyer to assess whether the sole proprietorship form is appropriate for their needs.

< Back to Business Organizations Center