HowTo Video Tutorial Script (667 words)

-Elizabeth Ü: What’s the best legal structure for your business? This is one of those questions where the answer is ‘it depends’. This video will help you identify whether or not it makes sense to do business as a sole proprietor. As always it’s smart to consult a lawyer who specializes in business entity formation if you have questions or need further guidance.

Let’s get the most obvious question out of the way – What is sole proprietorship? There are several different business structures or entities that you can choose from for a

business. Sole proprietorship is one of them. Other common business structures include partnerships, limited partnerships, C corporations, S corporations and LLCs and there are others that vary from state to state. If you haven’t paid a fee, filled out a bunch of paperwork and filed it with a state for one of the other entity types you are doing business as a sole proprietor.

What this means is that you and your business are the same legal entity and you’re probably filing all income and expenses related to the business on your own personal tax return, rather than filing a separate return for the business, which leads me to the advantages of sole proprietorship. It’s super convenient, there’s very little paperwork, if any that you have to file to get started.

Of course you should check your local business office for specific requirements as they do vary from state to state particularly as they relate to collecting sales tax. As I mentioned before income tax filing is a lot simpler as a sole proprietor then if your business entity is separate from you as an individual or at least you’ll only need to file one tax return rather than one for you plus one for the business.

And as a sole proprietor you have complete control over the business unlike other entity structures where you may have governance requirements, such as having a board of directors or shareholders to worry about.

But there are some significant disadvantages of sole proprietorship as well. You can’t go into business with another person as a sole proprietor, to do that you’ll need to look into another business structure such as a partnership, a corporation or an LLC. And as a sole proprietor you are personally responsible for everything the business does, so if say the business racks up some serious debt or gets into legal trouble that debt or that legal trouble is yours.

Your personal assets including your house, your rainy day funds are potentially at risk even if you didn’t have anything to do with a mistake. In other words, when you’re a sole proprietor if someone else such as your employee does something outrageous while working for your business you can be held responsible – and you’ll have fewer fundraising options because while you can sell shares of a business you can’t really sell shares of yourself in order to raise capital for a sole proprietorship.

If the following statements sound like you then sole proprietorship might be a good fit. You want to get started right away. You value things like convenience and simplicity when it comes to filing taxes. You’re not playing to partner closely with anyone else in business other than perhaps hiring employees and you’re not really worried about being personally liable for any business debt or legal action.

But sole proprietorship is probably not the best fit for you if you have personal assets that you’d like to protect from the business’s activities or if you want to try and take advantage of better tax rates like certain company tax rates, or if you want to go into business with one or more partners, or if you intend to sell stock in order to raise money for the business. In any of these cases you’ll probably want to consider one of the other business entity types.

Thanks for watching and be sure to check out our other small business guides.