If you are a single business owner and have not formed a business entity with the Secretary of State, you are considered a sole proprietorship. If you have not formed a business entity with the Secretary of State, and have multiple business owners, the default is a general partnership. While a sole proprietorship may seem simple on the surface, there are some very important concerns you need to be aware of before settling for this business designation.
As mentioned, a sole proprietorship is a single-owner business that has elected not to form a business entity with the Secretary of State. Still recognized as a business, the sole proprietorship has its own set of rules, liabilities and taxation. Both Texas and the federal government treat the owner and business as one in the same. A sole proprietor is personally liable for all business debts incurred by the company. Likewise, the company is equally liable for all personal debts incurred by the business owner. In other words, sole proprietorships do not provide the owner with limited liability for the company’s debts and legal actions. The assets of the owner and the business all belong to the sole proprietor, and creditors have the ability to go after both when collecting on debts. If a judgment is taken against the business, your personal assets are likely subject to seizure in an effort to satisfy the business debts. While you can obtain liability insurance to cover this scenario, it does not guarantee your personal assets won’t be sought, post-judgment. Additionally, you are often left to the discretion of the carrier’s insurance defense counsel when it comes to settling lawsuits covered by your policy. Not all circumstances can be anticipated and insured, leaving you potentially liable for legal fees and judgments.
A sole proprietorship is subject to pass through taxation. Pass through taxation simply means that the company’s profits (and losses) are taxed at the owner’s personal income level. A sole proprietorship files its taxes with the IRS by reporting its profits and losses on a Schedule C form. The Schedule C accompanies the individual’s 1040, and Schedule SE, when filing the tax return with the IRS. The Schedule SE involves payment of self-employment taxes which consist of Social Security and Medicare taxes (a.k.a. “FICA taxes”).
The Masteller Law Firm can advise you on your current business structure and help set up necessary protections to allow you to freely operate your business.
