Having an idea for a business is great. But it's just the first step in starting that business. Now's the time to consider all the legal mumbo jumbo about how to set up the company. All businesses are not created equal. In fact, there are five ways in which businesses can be organized. Starting a business without knowing how to structure it is like beginning to write a novel without a clue about the plot.
You're on your own and ready to go. You can incorporate your business. You may even be able, as a sole owner, to set up a limited liability company. But if you take no legal steps at all, you're automatically a sole proprietorship. When you hear the term proprietor you may picture the guy running the luggage store downtown, but the term applies to people in all kinds of businesses. It doesn't matter whether you have a product or service to sell. Whether you're a dentist, an accountant, or even a member of the oldest profession, if you're in business alone and haven't incorporated, you're a sole proprietor.
As a sole proprietor, you're also called a self-employed person because you're not an employee of your business. You may sometimes see sole proprietorships referred to as unincorporated businesses when getting easy money because they haven't taken the legal steps required by state law to become corporations. Consultants who work as independent contractors are also considered sole proprietors.
A sole proprietorship is the easiest form of business to set up and the least costly to get started because you basically don't have to do anything. Keep in mind that you can start a business as a sole proprietor and become some sort of corporation later on for getting easy money.
As a sole proprietor, your business is your alter ego. You're virtually one and the same for both legal and tax purposes. Legally, you're responsible for any debts of the business. Say you sign a lease for a photocopier for your business so you can keep duplicates of invoices and make copies of your face when business is slack. After a few too many of those slack times, you can't keep up the lease payments. The leasing company can come after your house, your savings, your collection of face photocopies, and any other personal assets they want to pay off the remaining balance.
Just because you have the potential for legal wrangles doesn't mean you have to go unprotected. Some states give partial or full homestead protection for your home, which means you won't lose your home if you lose a lawsuit. Other assets may also be protected by state law from the claims of creditors.
Ever heard that government encourages small business? Think again. If you decide to go out on your own, just when you need Uncle Sam's help most for getting easy money, you may find yourself out in the cold. Because a sole proprietor is a self-employed person, he can't get the same protection offered to employees. This means that a self-employed person can't get workers' compensation or unemployment insurance. As a self-employed person, you can't be covered under these programs.
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