Choosing Your Washington Business: Sole Proprietorship

Basic Considerations:

This series of article describes certain basic considerations and costs involved in forming a Washington business. Please note that choosing a business form should not be done in vaccum. Consideration as to how this decision may impactfuture alternatives is critical. For example, converting a LLC into a Corporation immediately before the business is acquired, rather than at an earlier time, may prevent the transaction from being tax-free.This article is only an overview, particularly as to tax issues and should not be substitute for a professional advisor’s analysis and recommendations based on your individual fact situations when establishing your business.

A. Selecting the Form of Business Organization:

No single factor is controlling in determining the form of business organization to select, but if the business is expected to expand rapidly, a corporation will typically be the best alternative because of the availability of employee incentive stock plans; ease of accommodating outside investment and greater long-term liquidity alternatives for shareholders. A corporation also minimizes potential personal liability if statutory formalities are followed.

The characteristics of a Business are described below, followed by an overview of other traditional forms of business organizations. Each of the following factors is described for comparison purposes: 1) statutory formalities of creation, 2) tax consequences, 3) personal liability of owners, 4) ease of additional investment, 5) liquidity, 6) control and 7) legal costs.

In my last post, Corporations were discussed. This post will focus on the least formal type of Washington Business: A sole Proprietorship.

When an individual operates a business on his own, the individual and business are treated as one. No statutory filings are required. A sole proprietor faces enormous risks in liability of business. Creditors can pursue all of the individuals assets.

Taxation: Income from a Sole Proprietorship is taxed as personal income on a 1040 Tax Form.

Because of its nature, borrowing is typically the only method to raise capital for a Sole Proprietorship, and the costs associated with forming sole proprietorship is minimal.

See a Kirkland Small Business Attorney for more information on the risks/ benefits associated with this type of business entity.