THE IMPORTANCE OF FORMING A LEGAL ENTITY
Q. My business is a Sole Proprietorship. Is this classification significant?
For the most basic business, such as a hobby, this designation is fine. Unless you use dangerous equipment, sell a product, have high liability or hire employees. But keep in mind, a Sole Proprietorship is not a true legal entity. It does not provide personal liability protection, which means there is no separation between the business and the owner. If sued, your personal assets can be taken. As well, if business debts cannot be paid with business assets then your personal assets can be taken.
There is a large misconception in the business community that this entity form is acceptable due to the ease and low cost to form.
Another important fact to consider, since there is no legal distinction between the business and owner, the business will cease to exist upon the owners death. Similarly, if you want to sell or pass on the business it can’t be done.
There are also tax considerations. This business form does not allow an owner to take advantage of various tax savings, including reducing self-employment taxes.
The above is also true for a general partnership. I don’t recommend either of these forms to any of my clients. Some questions to ask yourself. If you sell products, what if a customer hurts themselves and sues you? If you have employees, what if they become disgruntled or injured? If you take out a loan on the business and then the business fails do you have enough personal resources to cover the debt and not lose your house or other personal assets? It is not worth the risk.
Alternatively, creating an LLC or Corporation is not expensive or a difficult process. If you want to develop a successful long term company, the smart thing to do is to form a legal entity. If you would like to discuss your specific business threats to determine the proper classification for your business don’t hesitate to contact us.
For more information on this business structure visit the SBA.Gov website.
Copyright 2014 Christi Rains, Alpha Omega Consulting & Bookkeeping, LLC