Over the last several months listening and reading viewer’s questions, the overwhelming response has been about choice of business entity. As any small business owner knows, starting a business is a daunting task and many simply focus on opening the doors and paying the bills. Many forget about strategic planning and liability issues. Over the next few weeks, I will highlight each of the major business entities available in Texas. With each entity, I intend on analyzing the benefits and problems associated with each. This week, I start with a sole proprietorship.
Sole Proprietorships
Generally, a sole proprietor is simply a business operated by a single individual and is not connected with any typical business entity. Many businesses operated out of the home or peddled door to door are sole proprietorships.
A sole proprietor generally operates under an assumed name (may or may not be filed with the County) and opens a bank account with the operator’s social security account. The business owner is personally liable for all debts and obligations of the business. No protection is afforded the business owner for business liabilities other than offered through applicable insurance policies. A sole proprietorship is the simplest of the business entities and the one with the most risks to one’s personal assets. It would be recommended for a person with limited assets and very little projected liability.
The sole proprietorship is not required to file a separate income tax form for the business as the business is operated under the social security number of the owner. Moreover, the money made will be subject to the self-employment tax (15%). Income in a sole proprietorship is not subject to the Texas margin tax.
In my practice, this is the least desirable entity considering no liability shelter exists and personal assets are not protected. So, for example, in the event of a lawsuit, that “mom and pop” shop will be sued in their assumed name as well as individually. Any proceeds necessary to pay for the lawsuit will come out of the personal funds or assets of the business owner. Clearly, this is not the best solution for limited liability and asset protection.
In the coming articles, I will address setting up corporations, limited liability companies, partnerships and limited partnerships as well the advantages of each entity.
Editor's note: The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.
