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.