Nicole Anderson of Anderson Law Group, Inc. will blog on “A Short Guide to Business Entity Planning” throughout 2009. Kindly contact us if you would like further information by visiting our website at www.andersonlawoc.com.

Business Entity Options:

Sole Proprietorship
Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company
The Corporation options (C or S Corp)

Topic 1: Sole Proprietorship

Overview: A Sole Proprietorship is the legal default entity.  If you file nothing at all with the Secretary of State, the state considers you a sole proprietor.  If you are a sole proprietor, your personal assets and your business assets and liabilities are one in the same.  You have little business formation and planning formality.  You personally own all the assets of your business.  It is a pass through taxation entity, so you avoid double taxation on your business assets and only personal taxes on your earnings.  However, you have to be willing to risk personal assets as you and your business are one entity.

The Advantages:  Because your business does not exist as a separate legal entity, the secretary of state requires little formality to form, manage or keep your business legally current.  Because there is only one owner, management is centralized.  You as the sole proprietor make all the decisions regarding your business.  Also, you are entitled to freely transfer your interest in the business. Finally, a sole proprietor is a pass through tax entity because you personally own the business. Thus, you avoid double taxation. 

The Disadvantages:  A major downside of operating your business as a sole proprietor is exposure to liability.  Since your business is not a separate legal entity, you, the owner, are personally liable for the business’s obligations and wrongdoings.  For example, if your business is sued and a judgment is required, creditors can go after your personal assets to cover payment owed. Another downside is that the business entity cannot continue beyond the life of the owner.