Learn some of the common advantages and disadvantages to having a sole proprietorship.
- Simplicity: A sole proprietorship is the simplest form in which to conduct a business. A sole proprietorship is not a legal entity itself. Instead, you, a natural person, directly owns the business and you are directly responsible for the business debts.
- Managerial Control: Total management authority rests with the sole proprietor. It is discretionary with the sole proprietor as to whether he / she delegates any of this authority to employees or others.
- Informal: Generally, no formalities are required to engage in business as a sole proprietorship other than compliance with appropriate licensing requirements. However, if the sole proprietor is conducting business in a name other than their own then the sole proprietor should complete and file a fictitious business name statement within each county where the sole proprietor conducts business.
- Profits Belong to the Sole Proprietor: Ordinarily the profits of the sole proprietorship belong to the sole proprietor. It is discretionary with the sole proprietor as to whether he / she shares these profits or not.
- Unlimited Personal Liability: While all profits belong to the business owner, so do all losses. If the business is unprofitable, or the sole proprietor incurs other liabilities, the sole proprietor is personally liable. Essentially, the sole proprietor places his / her entire personal assets and wealth at risk by conducting business as a sole proprietorship.
- Risk to Spouse: California is a community property state. The community property is liable for the contract obligations of either spouse incurred during marriage. If the sole proprietor is married, he / she places the community property at risk. What does this mean? Depending upon the circumstances, the sole proprietor’s separate creditors may be able to garnish his / her spouse’s wages, levy on bank accounts and / or property in an effort to satisfy their debt.
- Liability emanating from employees: If a sole proprietor hires employees the sole proprietor should be mindful of the increased risk of personal liability under agency and respondeat superior principles.
Need further legal help from an experienced lawyer in sole proprietorship and other aspects of the law? Contact Jon Alan Enochs for a consultation.
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