One of the most common business structures is the Sole Proprietorship. Out of the several structures available, this is a popular choice due to its ease of setup, individual ownership, and control provided to the owner. Ultimately, the question is, when setting up your business, should you consider this as one of your options from the range to choose from.
Simple and Inexpensive
One of the perceived benefits is how simple and inexpensive it can be for you. To set up a Sole Proprietorship, you need to file a fictitious name registration form with the Pennsylvania Department of State and properly advertise the name. In addition, you need to complete the PA100 form but only if you will have employees and need to register for workers compensation and unemployment, or if you will need a sales tax number. You will also need to make sure you have any license you may need for running your business.
Simple Tax Returns
One other perceived benefit is how simple your tax return will be. Any income from a sole proprietorship is usually accounted for on a schedule c on your personal tax return. A sole proprietorship does not file its own tax return.
The Disadvantages
The truth however, is that there are some real disadvantages to a sole proprietorship. The primary disadvantage is that because a sole proprietorship is not an entity, your personal assets are at risk to satisfy any liability that you incur while operating as a sole proprietor. Another significant issue is that when you register your fictitious name with the Pennsylvania Department of State, you do not receive the exclusive rights to the name. A fictitious name registration only puts the world on notice that you are using the name, anyone else can also file a fictitious name registration form and use the same name.
Alternatives
Instead of a sole proprietorship, anyone looking to start a business should seriously consider setting up a limited liability company (LLC) instead. Because an LLC is an entity, your liability is limited to the extent of your investment in the LLC. Your personal assets are not at risk to satisfy the debts and obligations of the LLC. In addition, because an LLC is an entity, when you file the certificate of organization for the LLC with the Pennsylvania Department of State, you are granted the exclusive rights to the name of your LLC. No one else in Pennsylvania can operate a business using the same name.
As for taxes, just like a sole proprietorship, the earnings for most LLCs are accounted for on a schedule C on your personal tax return. Finally, typically, the setup costs for an LLC are only slightly higher than the cost to setup a sole proprietorship. By the time you pay the filing fee for a fictitious name registration for your sole proprietorship and then the advertising costs to advertise your use of the name, you have paid a large portion of the cost to simply set up an LLC instead. Your money will almost always be better spent on the LLC.
Before you make any decisions, please contact us to set up an appointment. We will sit down with you and weigh all of your options regarding which structure is right for you and your business.
Disclaimer: This is a simple overview of the subject matter. Please consult an attorney for legal advice about sole proprietorship.
Sher & Associates, P.C. is a law firm located in Kutztown PA that can assist you in any of the following areas: business law, real estate law, family law, equine law and estate planning. We assist many individuals, businesses and families in and around Fleetwood PA, Blandon PA, Topton PA, Hamburg PA and Oley PA.
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