Congratulations, you have successfully chosen a name for you Small to Medium-size Business (SMB). Now, comes the hard or tricky part, as if choosing a name wasn't difficult enough. Actually, this next step may not be as difficult as I am making it out to be. In fact, choosing what corporate form your business will take can be quite simple depending your goals and objectives, as well as the size of the business, and your mission or plans.
I have decided to discuss the corporate forms segments via a series of blog posts rather than trying to tackle the various forms in one sitting. There are many corporate forms that you can choose to adopt for your business. Each form serves a different purpose, although there may be some overlap in the inherent form or structure of each corporate form. Basically, there are four corporate forms: (1) the Sole Proprietorship (SP); (2) the Partnership; (3) the Corporation; and (4) the Limited Liability Company (LLC).
This post will focus on the simplest of the corporate forms: the Sole Proprietorship or SP. Plain and simple, entrepreneurs usually choose to form their company as a SP because it is the simplest business form, and I do mean simple. Typically, as a SP you just slap a sign on your place of business and start raking in the dough. Yes, it is that simple. Well, not that simple, of course you need the business licenses that your city or town requires you to have to operate your business, but other than that you are flying solo fast if you choose this business form.
Another characteristic of the SP that people either love or hate is that the income generated by the business is treated as personal income, and while this may be cool for the sake of ease of management or seamless tracking, the downside to the SP is that this business form exposes you to personal liability and risk. This means that if someone sues you--you may find yourself in court in the fight of your life to keep your shirt or worse your house. But, don't fret here, as the SP works for some and not for others. But, I will say that the SP is not for the faint of heart. In any case, there are alternative corporate forms to choose from, and the SP is just one. Each corporate form has its own set of advantages and drawbacks which I have highlighted below:
Advantages of the Sole Proprietorship
- You are in business pretty much Day 1;
- SPs are easy to form;
- you control all of your profits;
- you call the shots;
- flexibility;
- you don't have to file a separate tax return for business; and
- there is less governmental regulation
Disadvantages of a Sole Proprietorship
- As mentioned above, you are personally liable for 100 percent of all business debts and obligations;
- Difficulty raising the capital needed to grow and finance the business;
- Death or incapacitation of the owner may cause the business to terminate;
- Less professional appeal than a partnership or corporation.
Next Up: Partnerships
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