Sole Proprietorship PDF Print E-mail

The most basic business entity is a "sole proprietorship," which is a form of business whereby an individual carries on a for-profit business endeavor as the sole owner and decision-maker. The sole proprietorship is the simplest and least expensive form of business organization to form and to conduct from both a nontax and tax point of view.

A sole proprietorship form appeals to individuals starting a business that is intended to:

  • remain small,
  • does not involve great exposure to personal liability, and
  • does not warrant the expense of incorporation nor the ongoing expense of corporate formalities.
Professionals such as doctors, lawyers, and architects sometimes elect to function as sole proprietors during the early years of practice to avoid the expenses and formalities of incorporation.

Generally, a husband and wife can conduct business jointly and hold joint title to business assets in both names and still come within the definition of a sole proprietorship [see Corp. Code ยง 16202(c)(1)].

Personal Liability

The owner is personally liable for the obligations and liabilities of the business, even in excess of the amount invested. Therefore, not only are business assets vulnerable, but assets personally owned by the sole proprietor are also subject to the risks of the business.

Even with insurance, the possibility remains that liability may exceed available insurance coverage. The extent of personal financial risk to the sole proprietor is usually a consideration if the sole proprietor owns assets in excess of those dedicated to the business or if the business uses hazardous materials, produces hazardous products, or is otherwise likely to lead to accidental injury to an employee or customer.

Availability of Capital

The capital used in a sole proprietorship is limited to the personal funds of the owner and to the owner's ability to borrow. Here again, the sole proprietor is personally liable for repaying borrowed funds, even if money generated by the business itself is inadequate to do so.

Continuity of Existence

For a sole proprietorship, continued existence depends on the legal competence and continued life of the owner. A sole proprietorship ceases to exist on either incapacity or death of the owner.

Taxation

A person operating a sole proprietorship is taxed on the business income and the deducts business losses on the proprietor's individual return.

 

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