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Business Formation - Sole Proprietorships

Many new business owners look at sole proprietorships as an antiquated business structure because the business and the business owner are treated as one in the same. In other words, sole proprietorships offer no liability protection for the business owner.

Why would someone want to set up a business this way? Limited liability companies and other corporate entities cannot protect business owners from professional malpractice, such as with physicians, engineers, attorneys and accountants. In other words, if you are in a certain business, a limited liability or corporation offers no more personal liability protection than that of a sole proprietorship. However, limited liability companies can still afford you some liability protection in areas that are not related to malpractice, such as contracts and leases.

Sole Proprietorship Advantages:

(1) For Internal Revenue Service purposes a business owners simply reports the income on their 1040 at tax time. In other words, no additional corporate tax returns are required.

(2) If your home office is your principal place of business, your business is structured as a sole proprietorship, and you have less than $10,000 in business personal property, you are exempt from paying the business personal property taxes. Aside from the taxes themselves, you are also not required to file an annual business personal property tax return.

Sole Proprietorship Disadvantages:

(1) Sole proprietorships offer no personal liability protection. While some businesses are not protected by corporate entities for professional malpractice, corporate entities such as corporations or limited liability companies can offer personal liability protection in situations involving contracts, leases, and other legal situations where professional malpractice is not a concern.

(2) Sole proprietorships are difficult to pass a business on to family members or sell the business.

Common Sole Proprietorship Mistakes:

(1) Many business owners overlook sole proprietorships because they offer no personal liability protection. In same cases, considering sole proprietorships as an alternative to a corporate entity, such as a corporation or a limited liability company may be worthwhile, depending on your business and possible liability protection offered by other business entities.

(2) Only sole proprietorships operating out of a home office with less than $10,000 in business personal property are exempt from Maryland's annual business personal propety taxes. Many non-exempt sole proprietors fail to properly file the sole proprietorship's personal property tax return.

(3) Using non-attorney online vendors to create a sole proprietorship. Most online vendors simply input the text you type into a form that is freely available from the Maryland State Department of Assessments and Taxation to create your sole proprietorship.

The Proy Law Firm can help you decide if a sole proprietorship is the right choice for your business:

Contact us as any time if you are thinking about establishing a new limited liability company. It is important to start your new business off with the right type of business entity and the proper documentation in place.