Today begins Chapter 6: Boring! We’ll learn about the different business structures available to entrepreneurs, starting with sole proprietorship.

Sorry. But however boring this chapter may seem, it is every bit as critical as anything else you’ll read in this book. We promise to keep it on task, to the point, and brief (we’re even skipping Porter’s Preface), so stay with us!

The kind of business structure you establish really does matter. Talk to your accountant. Talk to your attorney. Get this right. Ask questions and insist that your key advisors give you the answers to the questions you don’t know to ask. If you are going solo, it’s pretty easy to choose how to structure your company. If you are partnering, know what structure provides the best tax advantages, and set one up that easily allows decisions to be made and executed.

DISCLAIMER: This chapter does not replace your interaction with two of the three most important relationships you will establish—your attorney and your accountant.

Sole Proprietorship

If you are a sole proprietor, you are a single owner. Consider this entity when you want to assume complete responsibility for your business, both with assets and with liabilities. The income generated by this type of business is taxed as personal income. The majority of small businesses function as sole proprietorships. After all, it is the simplest form of organization and allows one person to control the business. But, of course, with control that comes all of the risk and responsibility.

These types of businesses may use trade names, fictitious names, or Doing Business As names (DBAs). Nonetheless, according to state law, the entity does not have a unique legal existence aside from the owner. Trade names need to be registered with appropriate government agency where the business exists. Depending on your state, that registration may take place at the state or local level.

A sole proprietorship minimizes legal restrictions and all profits are retained by the proprietor. Typically, you will have less paperwork; as a result, exiting the business is simpler.

Also, sole proprietorships are not required to acquire Employer Identification Numbers (EIN) from the Internal Revenue Service until they hire employees.

You are not required to file separate income tax returns for the proprietorship. Financial results are reported on the owner’s income tax returns—federal and state.

Self-employed persons are not considered employees; therefore, the provision to withhold monies to pay Social Security, federal or state taxes is nonexistent. However, quarterly estimated tax payments must be made to cover these liabilities.

Sole proprietorships have limited ability to raise capital. All debts and liabilities are solely the owner’s, and the business ceases to exist when the owner ceases to exist (for now, no religious philosophizing, please).

Tomorrow we’ll learn about general and limited liability partnerships. Hopefully not too boring!