Considerations in Forming a Sole Proprietorship

Sole proprietorships are the most common and simple form of business organization. They are formed by persons who own all or most of the business property and assets. They are 100% responsible for all of the control, liabilities and management of a business. A sole proprietorship, as its name states, has only one owner. The sole proprietorship is merely an extension of its owner: a sole proprietor owns his own business, and no one else owns any part of it.

As the only owner, the sole proprietor has the right to make all the management decisions of the business. In addition, all the profits of the business are his. In return for his complete managerial control and sole ownership of profits, he assumes great liability: he is personally liable for all the obligations of the business. All the debts of the business, including debts on contracts signed only in the name of the business, are his debts. If the assets of the business are insufficient to pay the claims of its creditors, the creditors may require the sole proprietor to pay the claims using his individual non-business assets, such as money from his bank account and the proceeds from the sale of his house. A sole proprietor may lose everything if his business becomes insolvent. Hence, the sole proprietorship is a risky form of business for its owner.

In light of this risk, some people ask why any person would organize a business as a sole proprietorship? There are two reasons. First, the sole proprietorship is formed very easily and inexpensively. A person need merely set up his business to establish a sole proprietorship. No formalities are necessary. He may have a sole proprietorship even though he does not intend to create one. Second, few people consider the business-form decision. They merely begin their businesses. By default then, a person going into business by himself automatically creates a sole proprietorship when he fails to choose another business form. These two reasons explain why the sole proprietorship is the most common form of business in the United States.

Because the sole proprietorship is merely an extension of its owner, it has no life apart from its owner. It is not a legal entity. It cannot sue or be sued. Instead, creditors must sue the owner. The sole proprietor, in his own name, must sue those who harm the business.

A sole proprietor may hire employees for the business, but they are employees of the sole proprietor.

Transferability of a Sole Proprietorship

A sole proprietorship is highly transferable. "Transferability of ownership " refers to the ability of an owner of a business to sell or convey that ownership interest to another. Transferability also refers to the impact such a transfer will have on an existing business venture. Transferability varies greatly among business organizations.

The sole proprietor is, essentially, the business. If a proprietor sells his business the proprietorship ends for that person, while a new one is formed by the buyer.

Duration of a Sole Proprietorship

The "duration of a business" is the measure of the business' ability to operate even upon the death, retirement, or other incapacity of the owner. The business' duration depends heavily on the form of business organization selected. A sole proprietorship usually terminates automatically upon the death or incapacitation of the owner/proprietor.

Capital Requirements of a Sole Proprietorship

The ability to raise capital for a business is limited by the nature of the business organization. The immediate and long-term financial needs of a business are very important factors in selecting a business organization. Sole proprietorships are the most limiting form of business organization in terms of raising capital. The principal source of capital is the proprietor's personal wealth or personal credit-worthiness for borrowing purposes.

Taxation Considerations of a Sole Proprietorship

Federal and state taxation have influence on the type of business organization to form. Tax treatment varies widely. Typically, the income of a sole proprietorship is taxed as the personal income of a proprietor. The business itself does not pay taxes on its profits.

Registration and Licensure of a Sole Proprietorship

When a sole proprietor conducts business under an assumed name, that name must be registered with the Utah Division of Corporations and Commercial Code using an application available from the Division. Also, be certain to obtain all required local and municipal business licenses before commencing business.