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What's the right business entity for you? Examining sole proprietorships

It's a story that has become increasingly common thanks to the proliferation of social media platforms. A person makes a particular item purely for fun, posts some images on their Facebook account and it suddenly generates hundreds -- if not thousands -- of likes. From there, they decide to start offering their crafty item for sale on the Internet, perhaps via e-commerce sites like Etsy, and start realizing a profit.

As exciting as it can be to become a sort of accidental entrepreneur, those in this situation, as well as those actively seeking to start a business, will understandably have questions, including whether they should consider organizing as a sole proprietorship.

What is a sole proprietorship?   

At its core, a sole proprietorship is an unincorporated business entity owned and operated by a single person with no real distinction between the venture and the proprietor. As such, the owner receives all of the profit, but is also personally responsible in the eyes of the law for all debts, losses and other liabilities.  

How common are sole proprietorships?

The U.S. Small Business Administration identifies sole proprietorships as being among one of the most common structures selected by budding entrepreneurs to start a business owing to its formation requirements -- or lack thereof.

What actions are required to form a sole proprietorship?

As it turns out, no real formal action has to be taken to form a sole proprietorship, meaning no incorporation-related documents have to be filed with the state.

Indeed, the status is automatically derived from business activities. For example, if you are a freelance photographer, you're already considered a sole proprietorship.

Does this mean than a sole proprietor doesn't have to take any action?

While a sole proprietor doesn't have to take action concerning formation, they might still need to take certain actions like any other business, including securing the necessary permits and/or licensure, and registering any fictitious name under which business operations are carried out.

We'll continue this discussion in our next post, exploring the tax responsibilities of sole proprietorships, as well as the advantages -- and disadvantages -- of this type of entity.

If you have questions about business formation or related transactional matters, consider speaking with a skilled legal professional who can provide answers and pursue solutions.

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