Forming a Sole Proprietorship in Northeast Ohio
Sole Proprietorship in Ohio
Deciding what type of business entity to use as the structure for your business can be challenging. If you are a small business owner, you probably operate as a sole proprietorship. However, is a sole proprietorship right for you? Let’s look more closely at this type of business entity, including the pros and cons of a sole proprietorship.
What is a Sole Proprietorship?
A sole proprietorship does not require you to file any special forms with the state or follow any specific rules regarding management and operational decisions. As long as you are the owner of the business, and you do not take any actions to formalize the business structure, such as incorporating your company, the default business entity for your company is a sole proprietorship.
The name of your company is your legal name. Therefore, if you choose to operate your company as a DBA (“doing business as”) or under a different name, you must register your name with Ohio Secretary of State. Registering your name ensures that you are not using another company’s name by mistake. It also ensures that another company cannot use your name in the state of Ohio.
Even though you are a sole proprietor, you are still required to obtain the necessary permits and licenses to conduct business. The types of permits and licenses vary by location and business type.
Pros and Cons of a Sole Proprietorship
As with every business entity, there are benefits and disadvantages of choosing a sole proprietorship.
Benefits of Being a Sole Proprietor
The main benefit of choosing a sole proprietorship as the entity for your business is the ease of setting up and operating the business.
Sole proprietors also have absolute control over how the business is structured and operated. There are no officers, board members, shareholders, or partners to consult whenever business decisions are made. A sole proprietor has the sole authority to make decisions for the business. If you want to pass up a job to take a family vacation, you do not need to worry about displeasing or pacifying anyone else.
The ease of tax preparation is another benefit of being a sole proprietor. Sole proprietorships are “pass-through” entities for tax purposes. The profits and losses of the business “pass-through” the company to the owner. The owner reports the business income and expenses on his or her personal income tax return. Any profit from the business is taxed at the owner’s personal income tax rate.
A pass-through entity avoids the problem of double taxation. For example, the profits of a corporation are subject to double taxation. The corporation pays corporate taxes on profits and shareholders pay personal income taxes on dividends.
Disadvantages of Being a Sole Proprietor
There are some disadvantages of operating a business as a sole proprietor. Sole proprietorships are subject to unlimited personal liability. The business owner is personally liable for all of the company’s debts, liabilities, and obligations.
Being a sole proprietor can make it more difficult to raise capital for your company. You cannot sell a portion of your company to raise money. You are personally liable for any loans or credit that you secure for the company. Banks and other lending institutions often require personal guarantees from the owner and may require that the owner pledge personal collateral (such as a home or vehicle) to guarantee the company loan. An owner could lose substantial personal assets if the company cannot pay the loan payments.
Can an Ohio Business Attorney Help?
Being a sole proprietor allows you to have the freedom you desire to make decisions for yourself and your business. However, it can also be a heavy burden. Making all decisions and accepting unlimited personal liability can be stressful. There may be other options for your business structure.
A Northeast Ohio business attorney can help you identify the needs and goals for your business and proprietorship. Your attorney can help you decide on the business structure that gives you the advantages you want while avoiding the aspects of a business entity that you cannot accept.
Northeast Ohio Sole Proprietorship Lawyer
Contact Attorney Heather Moseman to schedule a consultation by calling (440) 255-0832 or by completing the contact form on our website.