A sole proprietorship is the simplest, least regulated, and most common form of business organization in the United States (but not in Georgia, that is the LLC, which we will get to later). Legally and for tax purposes, the individual owner is the business. The liabilities and profits are personal to the owner. There is one owner.
Pros of a Sole Proprietorship:
- Easy and fairly cheap to establish. Georgia requires that a sole proprietorship operating under a trade name (i.e. a fictitious name other than the individual’s name) register in the county where the owner resides. This allows creditors and others the opportunity to learn the identity and address of the owner since it will be the owner who is personally liable for the debts and obligations of the business. The Clerk of Superior Court for your county will have the application forms; many are available online.
- The owner has absolute, total control over the business.
- The business itself does not file a tax return. Instead, the income (or loss) passes through and is reported on the owner’s individual tax return.
- Sole proprietors should contact their local, state, and federal tax authorities regarding the collection of sales and other taxes (e.g. occupational taxes also known as the business license, which we discussed in January, and unemployment (state and federal) taxes for example, if the sole proprietor has employees who must be on payroll).
- Sole proprietors should maintain adequate books and records to successfully run the business and for tax purposes. There are no administrative requirements, such as maintaining minutes of meetings or passing resolutions.
- Although the law sees the sole proprietorship and person as one in the same, legally and for tax purposes, it is still advisable to open a business checking account if only for ease of administration of company funds from personal funds (payroll as an example).
Cons of a Sole Proprietorship:
- The owner has unlimited personal exposure to risk, as the owner is responsible for all liabilities incurred by the business. A legal judgment for damages against a sole proprietorship can secure a lien against the personal assets of the owner and the creditor may then foreclose on the lien. This unlimited liability is the greatest disadvantage of this type of business form.
- You can mitigate this risk with insurance and sound contracts. Different types of insurance coverage are available to lessen the perils of having one’s personal assets at risk. Also, having lawyer-drafted contracts will help reduce risk.
- The problem with total control is that if the owner dies, the business ceases to exist. The assets and liabilities of the sole proprietor will pass to his or her estate, but often the expertise and knowledge of the business usually die with the sole proprietor.
- A competent lawyer can assist the sole proprietor in arranging for the business to be transferred to a family member or some other person or otherwise assisting the owner with drawing up a plan of dissolution upon the death of the owner.
- As the business grows, the sole proprietor may wish to change to another business organization if it would result in significantly lower individual income taxes.
- Investors typically would not invest in a business organized as a sole proprietorship if only because there is no legal structure in place for securing private funds.
What are Registered Entities?
The 3 main registered entities include:
- The Limited Liability Company (LLC)
- The Limited Partnership (LP)
- The (“C”) Corporation
Organizers of these above entities register at the Georgia Secretary of State’s office (SOS), which is the authority in Georgia, which administers to registered entities.
If you maintain a valid email connected with your registration, you’ve probably received frequent email reminders from the Secretary of State’s office to renew your application for this registration online.
Avoid Registration Scams!
Your registration is a public record. A lot of companies send out formal-looking letters that are really just solicitors out to get your money for anywhere from $75, $125, or nearly three times the actual cost of your registration, which is only $50. You can renew your registration yourself online, using one of those frequent reminders emailed by the SOS..
When Should I File?
The deadline to file is April first. Yes, April Fools’ Day.
If you miss this deadline, you’ll owe a late fee.
If you forget to file, by the time August rolls around, you risk entering Administrative Limbo.
Administrative Limbo is the time when the SOS realizes you failed to file your renewal application on time. By August, they’re purging their databases of those unrenewed applications. If you fail to file, you risk being administratively dissolved. Which under the statute in Title 14 of the GA code means that you are no longer a validly existing company in GA.
So why is this a problem? Your contracts may be void and further, representations breached. Without your registration, you legally are not viewed as a valid entity in good standing. And if you’re entering into contracts without being a valid entity that could get tricky if a client decides not to pay or worse. It piles up! You want to make sure you enter your registration on time.
If you accidentally end up being administratively dissolved, it’s about five times the cost of annual registration to reinstate your company at roughly $250 per registration.
The #1 reason people register is for liability protection. This protection will only last so long as you don’t mingle your funds.
How To Not Mingle Funds:
- Keep separate bank accounts for your personal and business affairs.
- Use separate banks for your personal vs. business accounts.
- Use separate accountants.
- Have different tax identification numbers for your individual income under your social (usually) vs. your business income under an employment identification number (usually).
If you slip and mingle your funds, you make yourself vulnerable piercing the corporate veil, which is a way that collections and other parties seeking relief from you can get compensated by lifting the liability protections in place and enabling them to go after your personal assets.
2. Flexible Tax Treatment
Another reason people register is for their flexible tax treatment, ideally to reduce income tax as the business grows, and a salary makes more sense to protect the business income from individual tax rates in favor of business rates.
Lastly, the reason people register companies is collaboration because working together is always better. Two heads are better than one, as they say. And why not more?
Selling the American dream of freedom and independence to small business owners since 2013.