What is a Sole Proprietorship /Partnership?
By Nadia Cabrera-Mazzeo
Short Answer: Sole proprietorships and partnerships are the default legal structures when people start doing business without officially creating an LLC or corporation.
When you start a business without forming an LLC or corporation, you are automatically a sole proprietor, or partner if you have business partners. There is no special process to become a sole proprietor. When a business owner forms an LLC or corporation, then the business is considered incorporated and it is no longer a sole proprietorship.
Under a sole proprietorship, there is no legal difference between the business and the business owner. That means the owner and the business share money, debts, and other things even if the business has its own name and marketing materials.
How are sole proprietorships and partnerships taxed?
Since there is no legal difference between these types of businesses and their owners, business income and losses are simply reported on the owner’s personal tax return. This is called “pass-through” taxation. A sole proprietor’s business income may be subject to self-employment tax and income tax and the business income will be combined with other sources of income received by the business owner.
When is a sole proprietorship the best fit for a business?
The right type of legal structure for your business depends on many factors. Generally, sole proprietorships are a good fit for low-risk businesses, especially when they are just starting out. In this case, we mean the risk of getting sued, incurring a lot of debt, or failing to comply with industry regulations. A low-risk business means that there are little-to-no business debts, there are no employees, regulations are straightforward, and it is very unlikely that someone will get hurt because of business activities. Sole proprietors can greatly reduce risk by carrying proper insurance.
If you are a sole proprietor looking to hire employees or if you operate in a high-risk industry (e.g. food & product sales, construction, healthcare), Honest Contracts can help you protect your personal assets from attacks on your business by setting up an LLC or corporation.
Law office of Nadia Cabrera-Mazzeo, Esq.
Based in Taos, serving clients throughout New Mexico
505 427 2025
nadia@honestcontracts.com