Sole Propiretorships

Example of tax deductions for sole proprietorships

- Rent - Advertising costs - Insurance premiums - Interest paid - Cost of goods sold

Advantage: Managerial discretion of sole proprietorships

- sole proprietorship is sole decision-maker - free to select type of business, name of business, and business location - free to hire employees - free to sell the business without anyone's permission

Disadvantage: Unlimited personal liability of sole proprietorship

-extends beyond business investment to his/her personal assets (e.g., creditors usually cant reach personal residence, but can reach just about everything inside it, bank accounts, etc.) - extends beyond debts to torts and civil wrongs commiDed by employees during course of employment (respondeat superior)

Disadvantage: management vulnerabilities in sole proprietorship

Although sole proprietor has sole discretion to choose type of business and make management decisions, can be a disadvantage if s/he lacks expertise • Example: I think creating an App for iPhones would be a lucrative business, but I don't have the foggiest idea how to do it - May require sole proprietor to hire outside consultants for advice

Disadvantage: Lack of Continuity in Sole Proprietorship

Because sole proprietorship is so connected to the individual (sole proprietor), it generally ends at the death of the sole proprietor Even if assets of the sole proprietorship descend to heirs of sole proprietor who continue to operate the business, a whole new sole proprietorship is created

Reasons to file a fictitious name statement even if you're in doubt you need one:

Filing is easy and inexpensive • Failure to file if required may result in penalties (fine or refusal to allow sole proprietor to file law suit) • Registration/filing usually is valid for a few years and can be renewed

Advantage: Pass-through tax status in sole proprietorships

Income of the business (sole proprietorship) is passed through to the sole proprietor (owner) who pays taxes at his/her individual tax rate. The business itself pays no taxes.

Sole Proprietorship

a business owned and managed by a single individual

Personal Liability

biggest disadvantage of sole proprietorship, debt collectors can go not only after the assets of the business, but the sole proprietor's personal assets

Advantage: Ease of formation of sole proprietorships

easy and inexpensive to form and operate

How to form a sole proprietorship

get a license if needed - pick a name that isn't already being used in any state the business is operating in - don't forget to make arrangements for sales tax is selling goods/services - if you hire employees don't forget employer id # from irs and arrangements with SS for employee contributions

When do you need to get a license in a sole proprietorship?

if operating a business that requires it like a law firm, medical practice, hair stylist, real estate agent, etc..

Picking a name for a sole proprietorship

make sure it's not already being used, make sure it doesn't infringe on another company's name/trademark, may need to file fictitious name statement.

Can operate sole proprietorship under:

owner's name ( McClain's Auto Repair); or - under a trade name (City Best Auto Repair); or - under a fictitious name (name that does not disclose the surname of the business owner, e.g., Lucy's Auto Repairs) - Under a fictitious name (name that implies that there are other unnamed owners of the business (McClain & Company; McClain & Associates)

Fictitious Name

the name of your business that does not carry with it your last name

If business will operate in more than one state:

use firm to check national availability such as • CT Corsearch www.ctcorsearch.com or • Thomas CompuMark www.trademarks.thomasreuters.com

Fictitious name requirements

• Business name must be registered with state or local officials • Public records must identify the owner of the business operating under a fictitious name. (Sometimes called a "DBA" ("doing business as" statement.) • Purpose? So consumers know who actual owner of business is if they need to sue

Characteristics of Sole Proprietorships

• Business owned and managed by one person. • Virtually any business can be conducted as a sole proprietorship • Governed exclusively by state and local laws, but generally no permission from state is required to form a sole proprietorship

Role of paralegal in forming sole proprietorship

• Determine whether business requires a license • Review state statutes to determine requirements for fictitious names • Prepare and file fictitious name statements • Conduct full name search for business name (check availability) • Obtain appropriate tax forms and business permits

Advantages of Sole Proprietorships

• Easy and inexpensive to form and operate • Owner makes all the decisions • Can Keep 100% of Profits • Proprietorship Pays no Taxes

How do you know if business needs to register?

• If business name does not include the surname of the owner (e.g., Lucy's Auto Repairs), fictious name registration/filing is required • If business operates under an assumed name (e.g, Best in State Auto Repairs), fictitious name registration/filing is required ***regulations change state to state

Ways in which sole proprietor can protect him/herself from personal liability

• Insurance, but insurance does not cover all risks . . . and it's not free! • Negotiate Agreements with 3rd parties whereby they agree not to seize personal assets

Practice Tip for Paralegals forming sole Proprietorships

• KEEP AN EXEMPLAR FILE ON FORMING A SOLE PROPRIETORSHIP! • In Exemplar File keep all your notes; forms; instrucFons; useful phone numbers; names of people who were especially helpful at agencies you contacted; websites; etc. • This will be your easy-to-follow "roadmap" if you get this assignment again

Disadvantage: limited ways to raise capital in sole proprietorship

• Sole Proprietor's capital limited to personal funds or to what s/he can borrow from friends, family, or the bank • No partners to ask for contribuJons • No shares of stock to sell

restriction on business name

• Sole Proprietorship CANNOT operate under a name that may be confused with another business or enterprise - Example: "Dunked-In Donuts" -vs- "Dunkin Donuts" 'Starstruck Coffee -vs- Starbucks Coffee

taxation of sole proprietorship

• Sole Proprietorship itself does not pay tax • Income from the business is added to any other income that sole proprietor makes and sole proprietor pays taxes on the enCre amount according to IRS tax tables. • Business expenses may be declared and deducted from income; so owner will pay tax only on net earnings

Disadvantages of Sole Proprietorship

• Unlimited personal liability • Limited ways to raise capital • Lack of Continuity • Sole Proprietor may lack qualifications and/or experience to run the business