Welcome to entry #2 of our business formation series—Selecting a Business Structure. Long time readers will remember that it is important to pre-plan your business and select the right business structure.
If you will recall from Selecting a Business Structure, a Sole Proprietorship (“SP”) is the “simplest form of business.”
What is an SP?
A Sole Proprietorship is the most common form of business. In an SP, a single individual engages in a business activity without the necessity of formal organization.
Legally speaking, this means that there is not a legal distinction between the sole proprietor (business owner) as an individual and her business.
Imagine your adorable grandmother decides to start selling homemade quilts. She puts an ad on Craigslist (with your help, of course). Because your grandmother makes the most beautiful quilts, she receives a call in no time. The happy customer agrees to pay $500.00 for the quilt, and he asks your grandmother to whom he should make the check out. She responds, “Just me, honey.”
Your grandmother has engaged in a business for profit, and did not file a formal business organization. Your grandmother’s quilt sales qualify as an SP.
Should You Register Your SP?
In the example above, your grandmother’s SP shared her legal name. However, if you want to use a business name that is different from your legal name, Texas law requires filing an assumed name certificate.
—See Certificate for Certain Unincorporated Persons—Tex. Bus.& Com. Code § 71.051
The certificate must state the assumed name under which the business will be conducted, your full name and residential address, the period during which you will use the assumed name (not to exceed ten years), and a statement specifying that the business that will be conducted in the county under the assumed name is being or will be conducted or rendered as an SP.
—See Contents of Certificate—Tex. Bus.& Com. Code § 71.052
The certificate must be executed and acknowledged (notarized) by each individual named in the certificate. The certificate must be filed in the office of the county clerk in each county in which the person has a business, or conducts business.
—See Execution of Certificate—Tex. Bus.& Com. Code § 71.053 & —See Place of Filing—Tex. Bus.& Com. Code § 71.054
Why Choose SP?
The simple answer: It is quick, easy, and cheap, at first. As illustrated above, this is the most common form of business organization because it is so easy to start. You do not have to worry about filing anything with the Texas Secretary of State, you do not have to invent any sort of Operating Agreement, and you can close the business on a whim.
Why Should You Avoid SPs?
The biggest problem: There is no legal distinction between you and your business. If you personally own things, your business owns those things too. Your home, car, and personal savings account each are property of the business.
Therefore, the biggest problem with SPs is that as a business structure, it does nothing to protect you from liability. This means that if you get sued personally, and you lose at trial, your business can be up for grabs. It also means that if your business gets sued, and you lose at trial, your personal assets can be up for grabs.
Although the SP is initially appealing because you can start running a business and making money today, it is worth considering another business organization structure that will offer protections from liability. We will discuss some of the more common forms in the later blogs in this series.
What About Insurance Protection?
If you are dead set on using the SP form for your business, consider purchasing general liability insurance. This extra expense could go a long way to ensuring you some protections from liability. However, you will need to research each plan to find the best one for your business. Look for an insurance plan that will cover the majority of claims your type of business is likely to encounter.
What Else Should I Know?
You should check federal, state, and county or city laws for business license, general license, building permit, and zoning clearances that may apply to your business. Additionally, if you plan to hire employees, you will need to obtain an Employer Identification Number (EIN), which is the nine-digit number issued by the IRS for tax reporting purposes.
Your attorney can help you navigate the many requirements for any business organization form. She can also discuss the reasons for and against forming or continuing a Sole Proprietorship in more detail.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Business Law Division
1001 Main Street, Suite 200, Lubbock, Texas, 79401-3309
Tel: (806) 702-4852 | Fax: (800) 985-9479