(*Note: this discussion presupposes a basic understanding of limited liability entities and alternatives, which have been discussed before and which we will discuss more in the future.)
Many people starting a business often wonder if they need to set their business up as a corporation, LLC or some other entity. It is also common to encounter entrepreneurs who just automatically assume that they’ll structure their business as an LLC without really questioning whether they need to do so. By default, if you do not have an entity for your business, you will be considered to operate your business as a sole proprietorship, essentially meaning that the debts and obligations of the business will be considered to be your personal debts and obligations. Again, while this may be scary-sounding, it isn’t always that big of a deal for some people.
While having the limited liability offered by a corporation, LLC or some other entity may be a good baseline, there are some individuals who will have businesses that could actually be operated as a sole proprietorship without any entity structure at all.
How Do You Know If A Sole Proprietorship Is Okay For You?
First and foremost, if you have partners or other individuals with whom you work closely on your business, you will more than likely need to be another type of entity (maybe even a general partnership, but probably another type of entity). Therefore, you really should only be considering a sole proprietorship if you operate your business alone.
Whether you need an entity at all will depend on a number of other things, including (but by no means limited to):
1) The kind of service or product you are providing.
2) The degree to which you expect to make or lose money in the beginning.
3) Whether your business is or will be open to the public (i.e. a place or portal where the public can access physically or digitally).
4) Whether you plan to have employees or independent contractors.
5) The degree to which you will borrow money or seek investors.
6) How many assets you own in your name (home, stocks, etc.).
7) Your personal risk tolerance.
While we will discuss these issues in more detail over the next couple of weeks, it is important that you seek advice from legal counsel if you are starting a business or operating a business and have questions concerning your entity.