Is a Sole Proprietorship right for your business?
Unfortunately, there is no one-size-fits-all answer to this question. The answer will depend on your intended business structure, the services your business will render, and your goals for the future of your business.
That being said, if your goal is to get your business started right away and with as little start-up cost as possible, then you should definitely contemplate operating as a sole proprietorship. Sole proprietorships are the most common business structure in the U.S., accounting for 23 million people and 73% of all U.S. businesses.
Below we discuss the pros, cons, and formation logistics of sole proprietorship.
Pros of Sole Proprietorship
- Simple and Cost-Effective Formation – Sole proprietorships are less expensive and less complicated to set up than any other business structure option. This is because sole proprietors are not required to register with the state of Florida before doing business. They also do not have to take part in standard corporate formalities, like annual meetings or appointment of a board of directors. You are only required to obtain whatever licenses are necessary in order to begin operating, for example a food or liquor license for your restaurant.
- Full Management Control – By definition, a sole proprietorship is run by a single person. This means that you control every aspect of your business, from setting your hours to finding workspace to control of finances and internal operations. It also gives you the freedom to solely make decisions and changes without needing anyone else’s buy in, unlike partnerships or corporations. As the business grows, you are also free to explore the possibility of forming a partnership, a corporation, or an LLC.
- Straightforward Tax Filings- Sole proprietors benefit from the lowest tax rates and the easiest filing requirements of any business structure. Because there is no legal distinction between a sole proprietorship and the business owner, there is no need to file a separate tax return for the business. All profits go directly to the sole proprietor, and that income is treated as personal income and reported on the individual’s personal tax form. Note, however that the IRS may require your tax payments to be made quarterly in January, April, June, and September.
Cons of a Sole Proprietorship
- Personal Liability Exposure – Some sole proprietors don’t recognize that their personal assets could be at risk if the business defaults on unpaid debt or is brought into a lawsuit. As a sole proprietor, you are accountable for 100 % of all business debts and liabilities. This could expose everything, from your home to your car, or any property registered in your name. Insurance coverage is generally highly recommended for sole proprietors.
- Harder to Develop Capital – If you will require seed money for your business, then you might want to consider a different business structure. It is more challenging for sole proprietors to raise capital or obtain long-term financing because they have fewer assets to put up as collateral and they are inherently seen as higher risk investments. Additionally, you cannot offer stock in a sole proprietorship, so the likelihood of connecting with investors and reassuring them of a return on their investment is lower.
- Stress & Uncertain Succession Planning– Complete decision-making ability can be a blessing, but also a curse since you also bear all the responsibility – good or bad. There is offer a lot of pressure to succeed and unfortunately, you do not have partners to support you, and there is no one else to blame if you fail. Also, should something tragic occur, like death, physical impairment, or mental incapacitation the entire busines could be dissolved in absence of someone to take your place.
- Hard to Sell – It can be hard to sell a solely owned business for two reasons: 1) there is no separation between the business and the owner, so getting a precise valuation of the business and associated assets can be challenging and 2) a change in ownership could result in reduced or discontinued patronage where customer loyalty was due to the previous owner instead of the business itself.
- Professional Image – You may experience some challenges when trying to partner with other businesses and organizations because of the misconception that unincorporated entities are less professional than their corporate counterparts.
Forming a Sole Proprietorship in Florida
Unlike other business entities, you do not need to file anything or take any formal actions to form a sole proprietorship, since it is the default business structure in Florida. So, in addition to obtaining the necessary permits and licenses required by your jurisdiction and industry, you should discuss follow formation steps with your lawyer:
- Decide on a Business Name – A sole proprietor in Florida is allowed to use their own name or may use an assumed or trade name. To make sure your business name is available and will not violate trademark laws, you should conduct a search of your proposed name here: USPTO or Florida Department of State.
- File a Trade Name – If you use a business name that is different from your legal name, Florida requires you to register the trade name. After you have chosen and registered a name, Florida requires that it be published in a local newspaper in the county where your business is headquartered.
- Obtain an Employer Identification Number – Sole proprietors who will have employees are federally required to get an Employer Identification Number (EIN). This nine-digit number, issued by the IRS, is necessary for tax purposes and wage reporting. Even if you are not required to get an EIN, you may want to anyway as many banks expect one to open a bank account.
- Secure Liability Insurance – Because sole proprietors are personally liable for all debts and obligations, a business liability insurance policy is the best form of financial protection.
If you think a sole proprietorship is the right structure for your business or if you are unsure and have additional questions, contact Capital Partners Law for assistance.
What Should You Do Next?
If you are interested in learning more or speaking with an attorney at Capital Partners Law, there are plenty of ways to get in touch:
- Call us toll-free at (833) 7-CAPLAW.
- Find your nearest office and call to schedule a free consultation.
- Complete our New Client Request Form online. (No obligation – an attorney will review your information and contact you to discuss your needs).
- Schedule a Free Initial Phone Consultation online now.
- Schedule a Free Initial Video Consultation online now.
This article is for informational purposes only. It does not create an attorney-client relationship with any reader nor should it be construed as legal advice. If you need legal advice, please contact our firm.