When starting a business, understanding the right structure to have is essential for those in Los Angeles who are looking for counsel that understand local regulation. Proprietorship is a popular option when starting out in business in this area, however there are many associated questions. This article aims to outline the most frequent questions entrepreneurs have surrounding proprietorship, helping readers understand their options.

Proprietorship, also known as a sole trader, is a way of running a business that is owned and managed by one individual. In doing so, decisions relating to the business can be made quickly, without having to seek authority from anyone else. This article outlines the key facts that potential proprietors should consider when starting their business.

What is a Sole Proprietorship?

A sole proprietorship is a legal entity established to conduct business activities. This means that the business is entirely owned and operated by one individual. As the business grows, however, they may employ people or seek a partner’s involvement (more on this below).

In establishing a sole proprietorship, an individual takes on full responsibility for all the risks and successes of the business. As a result, all of the business’s debts, profits, and losses are the responsibility of the individual proprietor, whilst taxes are handled by the individual rather than the business.

What are the Pros and Cons of Sole Proprietorships?

Sole proprietorship remains one of the most popular business structures for startups. This is largely because they are incredibly easy and inexpensive to form, requiring no formalities such as filing legal documents. This makes it a popular choice for those who wish to test the waters of the business world before diving in and forming a structured business entity.

The ease and accessibility of forming a sole proprietorship also brings some potential downsides with it. These include the passing of personal liability onto the proprietor, meaning their personal assets are vulnerable if the business is sued. Additionally, proprietors are personally liable for any debts and taxes that arise from the business, and they are unable to obtain venture capital or raise capital by selling shares as is often encouraged with the corporation structure.

Can I Take On a Partner in a Sole Proprietorship?

Whilst the sole proprietorship structure is designed for a single individual, two or more people can join forces to create a business if the right terms and conditions are met. This is known as a “partnership”.

In forming a partnership, the parties do not need to formally file anything and instead agree to the terms and conditions of the partnership orally or in writing. As the business develops, it is wise for the partners to create a formal partnership agreement which outlines the terms of the partnership and how potential arbitrations will be handled.

What Are the Tax Obligations of a Sole Proprietor?

The tax obligations of sole proprietorship can depend on the scale and the nature of the business activities, as well as the country in which the business is operating. In the US, a sole proprietorship must apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS). This is free of charge and is used to identify the business on all tax returns.

As a sole proprietor, you may be required to pay:

• Self-employment tax – 15.3% of profits, used to cover Social Security and Medicare taxes.

• Income tax based on state and federal taxes.

• Sales and use tax on tangible goods that you sell.

• Separate business tax such as payroll taxes.

How Do I Hire Employees as a Sole Proprietor?

As a proprietor, you can hire employees as you would with any other business structure. In doing so, however, you should be aware of how you will classify them. Employees fall under one of two classifications; “employees” or “contractors”, dictated by their level of control and involvement with the business. The classification you give your employees can make a difference to taxes and your overall costs, so it is important to get it right.

Individuals hired as contractors have more freedom and control than that of employees, although they may be subject to more taxes depending on the jurisdiction in which they are operating. Paralegals from a service like Upcounsel can help explain the nuances in different jurisdictions and can explain the pro’s and con’s of both avenues.

Why Do I Need a Business Plan When I’m a Sole Proprietor?

No matter the structure of the business, having a comprehensive business plan is essential for the success of the venture. This means setting out objectives both in a short term and long-term perspective, forecasting stock needs and examining aspects such as pricing.

Being a sole proprietor, you will not need to submit your business plans to any external bodies such as the Secretary of State, or register with them.

Where Do I Start When Forming a Sole Proprietorship?

If you are located in Los Angeles and are looking to establish a sole proprietorship, it is important to understand your local regulations. Various legal services like UpCounsel provide free consultations for those looking to start their own business, and often have consultants or paralegals that are familiar with the regulations of the local area.

Topics:

Proprietorship,

Business Law,

Legal Structure

Topics: Proprietorship