By Eric P. Rothenberg, Esq.
Being your own boss is a dream for many. It is also a pleasant daydream to many more stuck in stifling offices or unfulfilling careers. In addition to freedom from an unsympathetic supervisor’s requirements, owning a business appeals to so many because of the opportunity for greater creative expression in your work and the perception that more money will go into your wallet rather than to a nameless, faceless higher-up in a corporation. Sole proprietorship, in sum, represents a classic iteration of the American Dream.
But few people are aware of, let alone prepared, for the responsibilities that come with owning your own business, especially if that business is operating as a sole proprietorship.
This article will examine what a sole proprietorship is and the consequences—good and bad—that result from doing business as a sole proprietorship with regard to formation, governance, taxes, liability, bankruptcy, and inheritance.
What is a Sole Proprietorship? Answers on Formation and Governance
A sole proprietorship is the simplest kind of business structure: one person owns and manages the business, with no legal distinction made between the individual and the enterprise. There are no partners. Sole proprietorships are also the oldest form of business—the first person to make a few extra pieces of pottery and barter it away, thousands of years ago, can take credit as the first sole proprietor.
Absolute creative freedom and managerial control comes with downsides too. Namely, a lack of legal protection and tax optimization.
In Massachusetts, if you are doing business under your own, your legal name, there is no need to file paperwork with state or local governments. However, if you are doing business under another name, and your own name is not within the name, you will need to file a your D/B/A Certificate (“doing business as”) with the town clerk in the town where your business or office is identified on letterhead, business cards or advertising addresses. Depending on the goods or services you offer, you may also need to obtain a business or professional license.
Setting up a separate business bank account is also must for financial tax, and legal reasons.
Under a sole proprietorship, your business’s income is your income, and you are responsible for paying taxes on it at the relevant individual income tax rate. This means you will pay income taxes, self-employment taxes [Medicare and social security] and
As you and your business are not separate legal entities, you bear full liability for any injuries or other losses your business incurs. General liability insurance can mitigate this, but the lack of legal distinction between you and your business could have devastating financial consequences in that your creditors can come after your personal assets for any debts of the business.
As in matters of liability and insurance, you have full financial responsibility for your business’s debts as a sole proprietor. This means business bankruptcy typically translates to personal bankruptcy which may not be best for you.
While passing a successful business down through the generations may be one of your aspirations, a sole proprietorship has only one owner, no separate legal personhood, and ceases to exist upon the death of the owner. That doesn’t mean the assets in the business cannot be passed along, such as good will, receivables, etc. but that can be a battle down the road unless a good estate plan is put into effect.
How a Lawyer Can Help
Facing these facts, you may feel worried or concerned. You may believe that owning your own business is out of reach for you, with the legal and financial risks of a sole proprietorship harrying you on one side and the costs and complexities of incorporation on the other.
This is not the case. There are many options available for incorporation, even for businesses with a single owner or partner, and for less than you may imagine.
I am here to advise you on the best course of action for your business plan including C Corporations, S Corporations, LLC’s [limited liability companies] etc. I can also help you file the relevant paperwork, no matter how you choose to do business. Call us today to discuss your options.