Sole Proprietorship Basics
The sole proprietorship is the simplest legal structure for owning your own business.
A sole proprietorship is a one-person business that is not registered with the state as a corporation or a limited liability company (LLC).
Sole proprietorships are so easy to set up and maintain that you may already own one without knowing it. For instance, if you are a freelance photographer or writer, a craftsperson who takes jobs on a contract basis, a salesperson who receives only commissions, or an independent contractor who isn't on an employer's regular payroll, you are automatically a sole proprietor.
However, even though a sole proprietorship is the simplest of business structures, you shouldn't fall asleep at the wheel. You may have to comply with local registration, business license, or permit laws to make your business legitimate. And you should look sharp when it comes to tending your business, because you are personally responsible for paying both income taxes and business debts.
Personal Liability for Business Debts
A sole proprietor can be held personally liable for any business-related obligation. This means that if your business doesn't pay a supplier, defaults on a debt, or loses a lawsuit, the creditor can legally come after your house or other possessions.
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Example 1: Lester is the owner of a small manufacturing business. When business prospects look good, he orders $50,000 worth of supplies and uses them in creating merchandise. Unfortunately, there's a sudden drop in demand for his products, and Lester can't sell the items he has produced. When the company that sold Lester the supplies demands payment, he can't pay the bill. As sole proprietor, Lester is personally liable for this business obligation. This means that the creditor can sue him and go after not only Lester's business assets, but his personal property as well. This can include his house, his car, and his personal bank account.
Example 2: Shirley is the owner of a flower shop. One day Roger, one of Shirley's employees, is delivering flowers using a truck owned by the business. Roger strikes and seriously injures a pedestrian. The injured pedestrian sues Roger, claiming that he drove carelessly and caused the accident. The lawsuit names Shirley as a co-defendant. After a trial, the jury returns a large verdict against Shirley as owner of the business. Shirley is personally liable to the injured pedestrian. This means the pedestrian can go after all of Shirley's assets, business and personal.
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