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Starting With the Right Legal Business Type, Sole Proprietorship

When starting your business, one of the things you will need to figure out is the legal form you should register your business as, in order to ensure that you are operating with the correct business profile and level of financial protection to suit your precise needs.

Though not a lawyer, having worked in several countries, across 3 continents, I have picked up a few things that I suspect will prove helpful in your decision making process, and would suggest that you consider some of the following issues carefully.

To start with, in all the countries I have worked, it was clear that there were usually a combination of 3 or 4 legal business types used to legally conduct business. And for the most part the similarities were significant.

The most common of these business types is a Sole Proprietorship. And though these may known by different names, in different countries, they are essentially subject to the same rules, regulations, financial protection and taxation.

So, when considering this business type it is good to be aware of essentially three key features that typically govern this type of legal business form.

1. You are personally liable for the debts of the business

With this type of legal business type, you are the business. This means that the bank can take your house in lieu of a debt incurred to conduct business. If you get sued for something you did wrong in your business, you also stand to loose your personal assets, including your house and car as they are all on the line.

From an operational perspective it means that bank accounts will be in your personal name, as if you had no business. Notably in most countries it would be possible to register a trading name, which you could attach to your bank account in order to receive checks in the name of your business, however it is still you that are on the hook.

One thing to keep in mind though is that even though operating your business as this type of entity exposes you to personal liability, in most countries where this is a serious risk, you are able to insure against liability from suits. And when it comes to debt, the upside is that you can use your personal credit history to conduct business cheaper, which if managed well, should never really prove to be an issue. Just pay your bills and all will be fine.

2. Your business is taxed as if it is you.

Simply put the profits from your business are treated as personal income, and you would declare it as such. You are also able to deduct most of your personal expenses, that relate to your business, from your taxable income, which might mean that if you work from home, a part of your living expenses could potentially be deductible. Essentially the business is you, and for the most part the expenses you incur to earn a living are treated as tax deductible expenses.

3. You are unable to sell the business, you can only sell the assets.

Though for the most part this will not prove a significant issue, it is important to realize that since you are the business, you cannot sell the business. You are able to sell the assets of the business, which may include trading names, stock, customer databases etc. however you have to be aware that to transfer the debts and liabilities of the business, you have to specifically contract that into the sale. And even then it does not necessarily resolve all the issues that may potentially arise, even after the sale of the business.

Here are some of the benefits of this type of business:

1. It usually costs nothing or very little to set up or register.

2. Business operating costs are considerably lower than the other available legal business forms, e.g. your accountant and lawyer will likely cost you significantly less, because things are just simpler.

3. It is easy to setup, and you can start operating your business very quickly.

4. As mentioned above you can rely on your personal credit history for conducting business so this will, initially at least, make things a little easier.

5. It is easy to close down as you simply stop doing business. There is usually little or no cost to shutting down this type of business, except of course for liquidating the assets and paying off debts and liabilities.

In a nutshell, if you are looking to operate a small business with little risk of someone suing you, and you are fine with putting your house up as collateral for your business debt, then this might be the one for you.

And though personally I do not prefer this type of business, either way I would suggest that you do take the time to discuss this with your accountant and lawyer before making a decision.

I wish you all the best with your ventures and invite you to share your comments and stories here.

Cheers!!