What You Must Know About a Sole Proprietorship?

When it comes to business forms, most people think only of corporations and LLCs. However, all businesses take on some form when they start up, and the majority of businesses start out as sole proprietorships. Some businesses later on decide to change that form to another. However, before you do, you need to make sure that you understand what a sole proprietorship can do for you.

Potentially Lowest Tax Rate

While it depends on your state, the sole proprietorship may have the lowest tax fees of any other business form, with the possible exception of the S Corporation. To find out, you will need to speak with a tax consultant or check the small business administration site hosted by your state's government. Most states include breakdowns of the various tax rates. Most of the time, sole proprietorships tend to be lower because they are the most common form, but they also come with the fewest protections.

Greatest Flexibility

A sole proprietorship also has the greatest level of flexibility of any of the other corporate forms, with the possible exception of the general partnership. In most states, you have no business formalities that you must observe, with the exception of filing taxes and other quality control guidelines that may apply.

The flexibility, however, does not extend to financing options. While you can take advantage of all the traditional lending options, you will not be able to open your business up to shareholders, nor will you be able to sell parts of your business to investors. Crowd funding and crowd sourcing may still be possible options, but you cannot sell stock.

Greatest Liability

Despite the benefits of the sole proprietorship, you have to realize that you will also face the greatest liability. If you go bankrupt, or a creditor attempts to seize your business assets, you cannot necessarily protect yourself from having personal assets seized as well. Many states have instituted additional laws to provide some protection, but you will still be left with the least protection if you choose to retain this business form.

Sole proprietorships are the standard business form in many instances. While many businesses change their form to avoid the risk of heightened liability, it is not always necessary. You will potentially have the lowest tax rate. You will also have the greatest level of flexibility. These two things may make it worth keeping the business in this particular form.

The author is associated with legalzoom which is a prominent provider of legal advisory services including services such as non profit organizations, filing bankruptcy, copyright, sole proprietorship etc to corporations and business houses.