Ask The Boss Lady’s Lawyer: What is a sole proprietorship?
Dear Boss Lady’s Lawyer,
I have clients, but I don’t have an LLC or a corporation. My friend told me that I’m not a business unless I am an LLC or a corporation. When I went to the bank, they told me I could open a sole proprietorship account since I don’t have an LLC or a corporation. Am I a business? What is a sole proprietorship?
Sincerely,
Ms. Business Identity Crisis
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Dear Ms. Business Identity Crisis:
You might need to consider a new handle because yes, you are a business, boss lady! You don’t have to have a limited liability company (“an LLC”) or a corporation to be a business. Entities like LLCs and corporations are referred to as “incorporated” entities, and they require a filing with the Secretary of State and an annual renewal. You don’t have to be incorporated to be a business, but being incorporated often comes with certain levels of liability protection, and sometimes, positive tax consequences. If you’re not incorporated and operating a business solely on your own for profit, you would be a sole proprietor and your business a “sole proprietorship.” If you’re operating a business for profit with others but have not filed any incorporation paperwork, then you would be a “partnership.” Careful, though, as there are partnerships that are incorporated. Today, we will focus just on the sole proprietorship.
A sole proprietorship, which I will refer to as a “sole prop,” is an unincorporated business, which means you didn’t file any paperwork with the secretary of state, and you don’t have a separate taxpayer ID number (akin to a social security number for a business). Any income that you make in carrying on the business is reported with your personal social security number. You don’t have an operating agreement or a shareholder agreement. You might use a “DBA” – a “doing business as” for marketing purposes, but it’s still you running the show and reporting the profits received.
What’s great about an unincorporated business (a sole prop or unincorporated partnership)? It is uncomplicated. Being unincorporated is free and doesn’t require a commitment to annual filings or legal documentation. Starting a sole prop is simple. You start doing business. When you want to stop doing business, you stop doing business. See – easy! It’s all yours. It’s simple. Nothing to file. Nothing to revoke. This is fantastic for a short-term entrepreneur, someone who is dipping their toe in a new venture but with great uncertainty.
The sole prop is not without drawbacks; otherwise, obnoxious lawyers would not have created entities such as the limited liability company (the “LLC”) and the corporation. A sole prop, while lovely in its simplicity and freedom, leaves you open to liability without any protections. What does that mean? That means, a client can sue you personally, and if the client gets a judgment against you, they can lien your house, garnish your wages, or bring you into court under penalty of perjury to disclose all of your financial information.
Ms. Business Identity Crisis, if your venture is short-term or uncertain, then a sole prop might be the best way to go for you, but if you’re in this for the long haul, then incorporating might be the right next step for you. I would suggest consulting with an attorney about potential liabilities and an appropriate entity for your business. In the interim, you should also consider liability insurance to make sure you are protected not just from liabilities up to a certain amount but that you have insurance to help you with the costs of defending yourself.
Trying to figure out the best steps for starting your business? Contact us for a helping hand as you navigate the many choices that come with being a new business owner.
Until later.
